-----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, U2hvlmkp64NHjDaVgY8H+ivHkyfcQJcK29B4S5VrQDAG1zTPbliwENkf1ZV4EaZC mOy4dwATEQcD0r8ZS2L06Q== 0000912057-01-001522.txt : 20010123 0000912057-01-001522.hdr.sgml : 20010123 ACCESSION NUMBER: 0000912057-01-001522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010116 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: 1508951 BUSINESS ADDRESS: STREET 1: 1750 TYSONS BLVD STREET 2: STE 1200 CITY: TYSONS CORNER STATE: VA ZIP: 22102 BUSINESS PHONE: 8882573550 MAIL ADDRESS: STREET 1: 1750 TYSONS BLVD STREET 2: STE 1200 CITY: TYSONS CORNER STATE: VA ZIP: 22102 10-Q 1 a2035193z10-q.txt 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 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. ================================================================================ Page 1 of 18 ILM II LEASE CORPORATION INDEX
Part I. Financial Information PAGE ---- 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
-2- ILM II LEASE CORPORATION PART I. FINANCIAL INFORMATION Item I. Financial Statements (See next page) -3- ILM II LEASE CORPORATION BALANCE SHEETS November 30, 2000 (Unaudited) and August 31, 2000 (Dollars in thousands, except per share data)
ASSETS ------ November 30, 2000 August 31, 2000 ----------------- --------------- 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 ======= ========
See accompanying notes. -4- 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)
Three Months Ended November 30 ----------- 2000 1999 ---- ---- 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 ======== ========
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 three months ended November 30, 2000 and 1999 (Unaudited) (Dollars in thousands, except per share data)
Common Stock $.01 Par Value Additional -------------- Paid-In Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- 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 ========= ==== ==== ===== ========
See accompanying notes. -6- ILM II LEASE CORPORATION STATEMENTS OF CASH FLOWS For the three months ended November 30, 2000 and 1999 (Unaudited) (Dollars In thousands)
Three Months Ended ------------------ November 30, ------------ 2000 1999 ---- ---- 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 ========= ======
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, 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- 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- 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:
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
(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- 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- 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- 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- 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- 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. -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: January 15, 2001 ------------------ EX-27 2 a2035193zex-27.txt EXHIBIT 27
5 3-MOS AUG-31-2001 NOV-30-2000 1,417 0 282 0 0 1,699 1,733 1,651 1,790 1,229 0 0 0 52 509 1,790 0 3,558 0 3,987 0 0 0 (429) 12 0 0 0 0 (441) (.09) (.09)
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