-----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, S1q63tEj098R+uw+jqZ9mOVjt2ML+6MUhC/TbxlbpixhQbM0DJILZCb4m2Q2Qli0 lvyyrbD2CjWzSLqo7sRFLw== 0000912057-01-541304.txt : 20020412 0000912057-01-541304.hdr.sgml : 20020412 ACCESSION NUMBER: 0000912057-01-541304 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011129 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25880 FILM NUMBER: 1801839 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-K 1 a2064771z10-k.txt 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) - ----- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: AUGUST 31, 2001 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 of organization) (I.R.S. Employer 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 TITLE OF EACH CLASS ON 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ 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 August 31, 2001: 5,180,952. The aggregate sales price of the shares sold was $500,000. This does not reflect market value. There is no current market for these shares. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS FORM 10-K REFERENCE - ------------- ----------------------- Registration Statement on Form 10 of registrant Parts III, Part IV dated July 20, 1995, as supplemented Current Report on Form 8-K Part IV of registrant dated June 8, 2001 ================================================================================ ILM II LEASE CORPORATION 2001 FORM 10-K TABLE OF CONTENTS
PART I PAGE - ------ ---- Item 1 Business....................................................................I-1 Item 2 Properties..................................................................I-5 Item 3 Legal Proceedings...........................................................I-5 Item 4 Submission of Matters to a Vote of Security Holders.........................I-5 PART II Item 5 Market for the Registrant's Shares and Related Stockholder Matters......................................................II-1 Item 6 Selected Financial Data....................................................II-2 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................II-3 Item 8 Financial Statements and Supplementary Data................................II-8 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................II-8 PART III Item 10 Directors and Executive Officers of the Registrant........................III-1 Item 11 Executive Compensation....................................................III-3 Item 12 Security Ownership of Certain Beneficial Owners and Management............III-3 Item 13 Certain Relationships and Related Transactions............................III-3 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............IV-1 Signatures ...........................................................................IV-2 Index to Exhibits ...........................................................................IV-3 Financial Statements and Supplementary Data................................................F1-F15
ILM II LEASE CORPORATION PART I ITEM 1. BUSINESS ILM II Lease Corporation (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 senior citizens (the "Senior Housing Facilities") under the terms of 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 contributed $500,000 to the Company in return for all of the issued and outstanding shares of the Company's common stock. ILM II had originally made mortgage loans collateralized by the Senior Housing Facilities to Angeles Housing Concepts, Inc. ("AHC") 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 majority-owned, indirect subsidiaries of ILM II, subject to the mortgage loans. Subsequently, the indirect subsidiaries of ILM II were merged into ILM II Holding. As part of the fiscal 1994 settlement agreement with AHC (the "Settlement Agreement"), ILM II Holding retained AHC 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. ILM II is a public company subject to the reporting obligations of the Securities and Exchange Commission. ILM II has elected to qualify and be taxed as a REIT under the Internal Revenue Code of 1986, as amended ("the Code"), for each taxable year of operations. In order to maintain its status as a REIT, 75% of ILM II's annual gross income must be Qualified Rental Income as defined by the Code. The rent paid by the residents of the Senior Housing Facilities likely would not be deemed to be Qualified Rental Income because of the extent of services provided to residents. Consequently, the operation of the Senior Housing Facilities by ILM II or its subsidiaries over an extended period of time could adversely affect ILM II's status as a REIT. Therefore, ILM II formed the Company to operate the Senior Housing Facilities, and by means of a distribution, transferred the ownership of the common stock of the Company to the holders of ILM II common stock on September 1, 1995. Because the Company, which is taxed as a so-called "C" corporation, is no longer a subsidiary of ILM II, it can receive service-related income without endangering the REIT status of ILM II. On September 1, 1995, after ILM II received the required regulatory approval, it distributed all of the outstanding shares of capital stock of the Company to the holders of record of ILM II's common stock. One share of common stock of the Company was issued for each full share of ILM II's common stock held. No fractional shares were issued. Holders of ILM II's common stock were not required to pay any cash or other consideration or to exchange their common stock of ILM II for the common stock of the Company. Prior to the distribution of the Company's stock, ILM II's shareholders received an information statement fully describing the Company and the distribution of its capital stock. ILM II Holding (the "Lessor"), a subsidiary of ILM II, leases the Senior Housing Facilities to the Company (the "Lessee"), pursuant to the Facilities Lease Agreement. In July 1996, the Company terminated the property management agreement with AHC, and 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. I-1 ILM II LEASE CORPORATION ITEM 1. BUSINESS (CONTINUED) On February 7, 1999, ILM II entered into an agreement and plan of merger with CSLC, the corporate parent of Capital. In connection with the merger, the Company had received notice from ILM II Holding indicating that the Facilities Lease Agreement would terminate on the date of consummation of the merger of ILM II and CSLC. The Facilities Lease Agreement 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. In November 2000, the Facilities Lease Agreement was extended through the earlier of the date on which the merger of ILM II with CSLC was to be consummated or March 31, 2001, and on a month-to-month basis thereafter if the merger were not consummated by that time. On February 8, 2001, ILM II received notice from CSLC terminating the merger agreement. As a result, the Facilities Lease Agreement is currently on a month-to-month basis. On July 6, 2001, ILM II's Board of Directors recommended to the shareholders that ILM II's Articles of Incorporation be amended to extend ILM II's finite-life existence from December 31, 2001, until December 31, 2008. On August 16, 2001, at ILM II's Annual Meeting of Shareholders, the proposal was not approved by the shareholders. As a result, ILM II announced that it will liquidate the Senior Housing Facilities commencing not later than December 31, 2001. The Company does not have any current plans to operate or own any other facilities or engage in any other business outside of its relationship with ILM II. Accordingly, upon the liquidation of the Senior Housing Facilities and the resulting termination of the Facilities Lease Agreement, the Company will carry out a plan of liquidation. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. It is currently expected that the Company will have nominal value after payment of its expenses. Pursuant to the Facilities Lease Agreement, the Company paid annual base rent for the use of all of the Senior Housing Facilities in the aggregate amount of $3,555,427 ($3,995,586 and $4,035,600 in 2000 and 1999, respectively). The reduction in base rent from the previous years 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. 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 the 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 Senior Housing Facility in an amount equal to 40% of the excess of the aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $11,634,000 ($13,021,000 through August 15, 2000, when the lease with respect to Villa Santa Barbara was terminated). For the fiscal years ended August 31, 2001 and 2000, variable rent expense was $1,006,000 and $1,437,000, respectively. I-2 ILM II LEASE CORPORATION ITEM 1. BUSINESS (CONTINUED) Descriptions of the properties covered by the Facilities Lease Agreement between the Company and ILM II Holding as of August 31, 2001 and 2000 are summarized as follows:
PROPERTY NAME YEAR RENTABLE RESIDENT AND LOCATION (1) TYPE OF PROPERTY FACILITY BUILT UNITS (2) CAPACITIES (2) - ---------------- ---------------- -------------- --------- -------------- The Palms Fort Myers, FL Senior Housing Facility 1988 205 255 Crown Villa Omaha, NE Senior Housing Facility 1992 73 73 Overland Park Place Overland Park, KS Senior Housing Facility 1984 141 153 Rio Las Palmas Stockton, CA Senior Housing Facility 1988 164 190 The Villa at Riverwood St. Louis County, MO Senior Housing Facility 1986 120 140
(1) See Notes to the financial statements filed with this annual report for a description of the agreements through which the Company has leased these facilities. (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. The Senior Housing Facilities are subject to competition from similar properties in the vicinities in which they are located. The properties are located in areas with significant senior citizen populations and, as a result there are, and will likely continue to be, a variety of competing projects aimed at attracting senior residents. Such projects will generally compete on the basis of rental rates, services, amenities and location. The Company has no real estate investments located outside the United States. The Company's sole business is the operation of the Senior Housing Facilities. Therefore, presentation of information about industry segments is not applicable. I-3 ILM II LEASE CORPORATION ITEM 1. BUSINESS (CONTINUED) 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. Through June 18, 1997, and subject to the supervision of and pursuant to the general policies set by the Company's Board of Directors, assistance in managing the business of the Company was provided by PaineWebber Lease Advisors, L.P. ("PaineWebber"). These services are now being provided to the Company, subject to the supervision of the Company's Board of Directors, by various companies, advisors and consultants including Greenberg Traurig, Fleet Bank, PricewaterhouseCoopers LLP, and MAVRICC Management Systems, Inc. There are currently three Directors of the Company. The Directors are subject to removal by the vote of the holders of a majority of the outstanding shares of the Company's common stock. The terms of transactions between the Company and related parties which provide services to the Company are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions. As discussed further in Item 7, on July 29, 1996, the Company terminated the property management agreement with AHC and retained Capital to be the property manager of the Senior Housing Facilities, and ILM II has guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. Capital earned property management fees from Lease II of $656,000, $903,000 and $980,000 for the years ended August 31, 2001, 2000 and 1999, respectively. I-4 ILM II LEASE CORPORATION ITEM 2. PROPERTIES As of August 31, 2001 and 2000, the Company has leased the five investment properties referred to under Item 1 to which reference is made for the description, name and location of such properties. Average economic occupancy levels for each fiscal quarter during 2001, along with an average for the year, are presented below for each property:
Average Quarterly Occupancy ------------------------------------------------------------------ Fiscal 2001 11/30/00 2/29/01 5/31/01 8/31/01 AVERAGE -------- ------- ------- ------- ------- The Palms 89% 89% 89% 88% 89% Crown Villa 90% 90% 81% 83% 86% Overland Park Place 94% 89% 84% 88% 88% Rio Las Palmas 91% 92% 92% 93% 92% The Villa at Riverwood 81% 77% 76% 75% 77%
ITEM 3. LEGAL PROCEEDINGS 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 6, 2001, in a Proxy statement filed on Schedule 14A with the Securities and Exchange Commission, the Company's Board of Directors recommended to the Company's Shareholders that the three Directors be reelected to hold office until the 2002 Annual Meeting and that the appointment of PricewaterhouseCoopers LLP as independent auditors be ratified. On August 16, 2001, the date of the proposed Annual Meeting of Shareholders, the Company had not received votes from a sufficient number of Shareholders to hold the Annual Meeting. I-5 ILM II LEASE CORPORATION PART II ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED STOCKHOLDER MATTERS Prior to September 1, 1995, the Company was a wholly-owned subsidiary of ILM II. Pursuant to a reorganization and distribution agreement, ILM II capitalized the Company with $500,000, an amount estimated to provide the Company with necessary working capital. On September 1, 1995, MAVRICC Management Systems, Inc., as the distribution agent, caused to be issued on the stock records of the Company the distributed common stock of the Company, in uncertificated form, to the holders of record of ILM II common stock at the close of business on July 14, 1995. One share of the Company's common stock was distributed for each outstanding share of ILM II common stock. No certificates or scrip representing fractional shares of the Company's common stock were issued to holders of ILM II common stock as part of the distribution. In lieu of receiving fractional shares, each holder of ILM II common stock who would otherwise have been entitled to receive a fractional share of the Company's common stock received a cash payment equivalent to $0.14 per share for such fractional interest. At August 31, 2001, there were 3,058 record holders of the Company's shares. The shares do not trade on an established exchange and the only market that has developed is a secondary market; therefore, little resale activity occurs. Although PaineWebber and others may endeavor to assist Shareholders desiring to sell their shares by attempting to match requests to sell shares with requests to purchase shares, such transfers are not expected to be frequent. The Company did not pay cash dividends in fiscal years 2001, 2000 and 1999, and will not pay cash dividends in the future. II-1 ILM II LEASE CORPORATION ITEM 6. SELECTED FINANCIAL DATA ILM II LEASE CORPORATION (Dollars in thousands, except per share data)
FOR THE YEAR ENDED AUGUST 31, ----------------------------- For the year ended August 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenue $ 14,180 $ 16,605 $ 16,250 $15,524 $ 14,433 Income (loss) before income taxes (1,273) 211 911 (36) (67) Income tax expense (benefit) (492) 475 342 (14) (27) --------- --------- --------- --------- --------- Net (loss) income $ (781) $ (264) $ 569 $ (22) $ (40) ========= ========= ========= ========= ========= Net (loss) income per share of common stock $ (0.15) $ (0.05) $ 0.10 $ (0.00) $ (0.01) ========= ========= ========= ========= ========= Total assets $ 1,982 $ 2,545 $ 2,770 $ 2,733 $ 2,126 ========= ========= ========= ========= ========= Shares outstanding 5,180,952 5,180,952 5,180,952 5,180,952 5,180,952
The above selected financial data should be read in conjunction with the financial statements and related notes appearing in Item 14 in this annual report. II-2 ILM II LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES On July 29, 1996, the Company terminated the management agreement with AHC covering the then six Senior Housing Facilities leased by the Company and retained Capital to be the manager of the Senior Housing Facilities. The term of the Management Agreement originally expired on July 29, 2001 but, in November 2000, the term was modified to be coterminous with the Facilities Lease Agreement. As a result, the term of the Management Agreement is currently being extended on a month-to-month basis. ILM II has guaranteed payment of all fees due to Capital under the terms of the Management Agreement. 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, as well as an incentive management fee equal to 25% of the amount by which net cash flow of the Senior Housing Facilities, as defined, exceeds a specified base amount. Each August 31, beginning on August 31, 1997, the base amount is increased based on the percentage increase in the Consumer Price Index as well as 15% of facility expansion costs. Occupancy levels for the five properties which the Company leases from ILM II Holding (six Senior Housing Facilities in 1999 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) averaged 86% and 91% for the years ended August 31, 2001 and 2000, respectively. The Senior Housing Facilities have generated sufficient net cash flow to cover the base rent payments at their current level of $3,555,427 during fiscal 2001 ($3,995,586 and $4,035,600 in 2000 and 1999, respectively, due to the termination of the Facilities Lease Agreement with respect to Villa Santa Barbara on August 15, 2000) since the inception of the Company's operations. 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 beginning in January 1997. 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. In fiscal years ended August 31, 2001 and 2000, the Company had variable rent expense of $1,006,000 and $1,437,000, respectively. At August 31, 2001, the Company had cash and cash equivalents of $931,000 compared to $1,894,000 at August 31, 2000. This decrease of $963,000 is primarily attributable to decreased cash flows from the operations of the senior housing facilities subsequent to ILM II's sale of its interest in Villa Santa Barbara. 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 2001, 2000 and 1999. The Company will not pay cash dividends in the future. 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. In August 2001, ILM II announced that it will liquidate its properties commencing not later than December 31, 2001. The Company does not have any current plans to operate or own any other facilities or engage in any other business outside of its relationship with ILM II. Accordingly, upon the liquidation of the Senior Housing Facilities and the resulting termination of the Facilities Lease Agreement, the Company will carry out a plan of liquidation. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. It is currently expected that the Company will have nominal value after payment of its expenses. II-3 ILM II LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS 2001 COMPARED TO 2000 REVENUES. Total revenues were $14,180,000 for the year ended August 31, 2001 compared to $16,605,000 for the year ended August 31, 2000, representing a decrease of $2,425,000 or 14.6%. Rental and other income from the Company's senior housing operations decreased $2,414,000 or 14.6%, primarily as a result of the sale of ILM II's interest in Villa Santa Barbara on August 16, 2000. Interest income decreased $11,000 or 25.6%, to $32,000 in fiscal year 2001, from $43,000 in fiscal year 2000, due to a decrease in cash and cash equivalents experienced throughout most of fiscal year 2001. EXPENSES. Total expenses were $15,453,000 in fiscal 2001 compared to $16,394,000 in fiscal 2000, representing a decrease of $941,000 or 5.7%. Although overall expenses decreased in relation to decreases in total revenues as described above, depreciation expense increased $176,000 or 27.7% due to recognition of changes in remaining useful lives for certain assets purchased in 2001 and prior to conform to the lease expiration date, as such assets are not subject to repurchase by ILM II Holding. General and administrative expenses increased $223,000 or 57.0% due mainly to increases in Director's & Officer's and property-level insurance of $187,000 over the previous year. Professional Fees increased $202,000 or 69.4% as a result of increases in legal, audit and other professional services over the previous year. Facilities Lease Agreement rent expense decreased $846,000 or 15.7% as the result of the decrease in base and variable rents due under the Facilities Lease Agreement since the sale of ILM II's interest in Villa Santa Barbara. Other decreases in expense included real estate taxes of $122,000 or 20.2%; property management fees of $247,000 or 27.4%; other property operating of $177,000 or 11.9%; and minor decreases in certain other expenses. These decreases were offset by a $412,000 or 100% increase in Liquidation expense as a result of the Company's August 31, 2001, accrual of the estimated cost of liquidating the Company. INCOME TAX EXPENSE. Income tax expense decreased $967,000 or 203.6% from an expense of $475,000 in fiscal 2000 to benefit of $492,000 in fiscal 2001 due to the Company's recording taxes receivable of $346,000 for amendments to its federal and state income tax returns from the previous year. NET (LOSS) INCOME. Primarily as a result of the factors discussed above, net loss increased $517,000 or 195.8% to net loss of $781,000 in fiscal 2001 from net loss of $264,000 in fiscal 2000. II-4 ILM II LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SAME-STORE FACILITY OPERATIONS The Company defines same-store facilities as those Senior Housing Facilities that were operated in each of the two most recent years. These include the five remaining Senior Housing Facilities and exclude Villa Santa Barbara because the Facilities Lease Agreement with respect to Villa Santa Barbara was terminated in August 2000. The net operating income of the five Senior Housing Facilities aggregating approximately 700 apartment units, which are considered same-store, is summarized as follows:
Year Ended August 31 ------------------------------------------ (DOLLARS IN THOUSANDS) 2001 2000 Change - ----------------------------------------------- ---------- -------------- ---------------- Revenue 14,148 14,101 0.3 % Expenses 8,884 8,475 4.8 % ----- ----- ----- Net operating income 5,264 5,626 (6.4)% ===== ===== ====== Average occupancy level 87.1% 91.0% (4.3)% Average monthly rent per apartment unit 1,760 1,681 4.7 %
Growth in same-store revenue was approximately 0.3% for the year ended August 31, 2001 when compared to the year ended August 31, 2000. Rental rate increases averaging 4.7% offset the results of lower occupancy levels and accounted for the entire increase. The average same-store occupancy level for the year ended August 31, 2001 was 87.1% compared to 91.0% for the year ended August 31, 2000. 2000 COMPARED TO 1999 REVENUES. Total revenues were $16,605,000 for the year ended August 31, 2000 compared to $16,250,000 for the year ended August 31, 1999, representing an increase of $355,000, or 2.2%. Rental and other income from the Company's senior housing operations increased $330,000 or 2.0%, primarily as a result of increases in rental rates at certain other facilities located in strong markets. Interest income increased $25,000 or 138.9%, to $43,000 in fiscal year 2000, from $18,000 in fiscal year 1999, due to an increase in cash and cash equivalents experienced throughout most of fiscal year 2000. EXPENSES. Total expenses were $16,394,000 in fiscal 2000 compared to $15,339,000 in fiscal 1999, representing an increase of $1,055,000 or 6.9%. Although overall expenses remained generally comparable, depreciation expense increased $342,000 or 116.7% due to recognition of changes in remaining useful lives for certain assets purchased in 2000 and prior to conform to the lease expiration date, as such assets are not subject to repurchase by ILM II Holding. Facilities Lease Agreement rent expense increased $136,000 or 2.6% as the result of the increase in variable rents due under the Facilities Lease Agreement. Other increases in expense included administrative salaries, wages and expenses of $229,000 or 19.1%; dietary and food service salaries, wages and expenses of $80,000 or 2.9%; general and administrative of $163,000 or 71.5% due mainly to increases in Director's & Officer's and property-level insurance of $113,000 over the previous year and minor increases in certain other general & administrative costs; and a $68,000 or 30.5% increase in professional fees as a result of increased legal fees. INCOME TAX EXPENSE. Income tax expense increased $133,000 from a benefit of $342,000 in fiscal 1999 to expense of $475,000 in fiscal 2000 due to the Company's recording of a Valuation Allowance against deferred tax assets not expected to be recovered due to termination of the Facilities Lease Agreement. NET (LOSS) INCOME. Primarily as a result of the factors discussed above, net income decreased $833,000 or 146% to net loss of $264,000 in fiscal 2000 from net income of $569,000 in fiscal 1999. II-5 ILM II LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INFLATION The Company completed its sixth full year of operations in fiscal 2001. The effects of inflation and changes in prices on the Company's operating results to date have not been significant. Inflation in future periods is likely to cause increases in the Company's expenses, which may be partially offset by increases in revenues from the tenant leases at the Senior Housing Facilities. Rental revenues may tend to rise with inflation since the rental rates on the tenant leases, which are short-term in nature, can be adjusted to keep pace with inflation as market conditions allow. As noted above, under the terms of the Facilities Lease Agreement between the Company and ILM II Holding, the Company is obligated to pay variable rent, in addition to the base rent owed, in an amount equal to 40% of the excess of total revenues from the Senior Housing Facilities over a specified base amount. Accordingly, to the extent that the total revenues are in excess of this threshold, a portion of the increase in revenues would be payable to ILM II Holding. RECENT EVENTS Historically, real estate has been subject to a wide range of cyclical economic conditions, which affect various real estate sectors and geographic regions with differing intensities and at different times. In 2001, many regions of the United States have experienced varying degrees of economic recession, and the tragic events of September 11, 2001, may have accelerated certain recessionary trends, such as the cost of obtaining sufficient property and liability insurance coverage and short term interest rates. The Company believes, however, that these tragic events should not have a material effect on the Company's portfolio, given the Company's property types and the geographic regions in which the Company is located. II-6 ILM II LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FORWARD-LOOKING INFORMATION CERTAIN STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL 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 ANNUAL 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 ANNUAL REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THE COMPANY MAKES ABSOLUTELY NO PROMISES, GUARANTEES, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY THEREOF. II-7 ILM II LEASE CORPORATION ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are included under Item 14 of this annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 12, 2001, the Company engaged PricewaterhouseCoopers LLP as its independent auditors, replacing Ernst & Young LLP. II-8 ILM II LEASE CORPORATION PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There currently are three Directors of the Company. The Directors are subject to removal by the vote of the holders of a majority of the outstanding shares of the Company's common stock. The Directors are responsible for the general policies of the Company, but they are not required to personally conduct the business of the Company in their capacities as Directors. (a) and (b) The names and ages of the Directors and Executive Officers of the Company during fiscal 2001 are as follows:
NAME OFFICE AGE DATES OF OFFICE - ---- ------ --- --------------- Jeffry R. Dwyer President, Secretary and Director 55 9/13/94*-present Julien G. Redele Director 66 7/28/98-present J. William Sharman, Jr. Director 61 9/18/97-present
* The date of incorporation of the Company. (c) There is no family relationship among any of the foregoing Directors or Officers. All of the foregoing Directors and Officers of the Company have been elected to serve until the Company's next annual meeting. (d) The business experience of each of the Directors and Executive Officers of the Company is as follows: JEFFRY R. DWYER is President, Secretary and Director of the Company. Mr. Dwyer has served as President of the Company since March 9, 1999. Mr. Dwyer has been a shareholder of Greenberg Traurig, which has provided legal services to the Company and its affiliates since June 1997. From 1993 to 1997 Mr. Dwyer was a partner with the law firm of Akin, Gump, Strauss, Hauer & Feld in the District of Columbia. Prior to joining Akin, Gump, Strauss, Hauer & Feld, Mr. Dwyer was a partner with the law firm of Morrison & Foerster from 1989 to 1993. Mr. Dwyer also presently serves as Secretary and Director of ILM II. Mr. Dwyer has written several law review articles and a major treatise on real estate financing and taught Real Estate Planning as an Adjunct Professor at the Georgetown University Law Center. Mr. Dwyer graduated from Georgetown University and received his law degree from the Georgetown University Law Center. JULIEN G. REDELE is a Director and served as President of the Company from July 28, 1998 through March 9, 1999. Mr. Redele is one of the original founders of SFRE, Inc., a Dutch owned real estate investment and development firm which has served since 1963 as advisor to Dutch institutional, corporate and individual investors active in the United States. Mr. Redele serves as a Director of the Island Preservation Partnership. Mr. Redele attended Westersingel Business School, Rotterdam, where he studied economics, law and finance. III-1 ILM II LEASE CORPORATION ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) J. WILLIAM SHARMAN, JR. is a Director and served as President of the Company from September 18, 1997 through July 28, 1998. Mr. Sharman is the Chairman of the Board and CEO of Lancaster Hotels and Resorts, Inc., a hotel management company. Mr. Sharman served for ten years as Chairman of the Board and President of the Lancaster Group, Inc., a real estate development firm based in Houston, Texas, which is the predecessor of Lancaster Hotel Management, L.C. and Bayou Equities, Inc. Mr. Sharman serves as a Director of Small Luxury Hotels, Ltd. of the United Kingdom, an international hotel marketing and reservations firm, and also serves on the Board of Trustees of St. Edwards University in Austin, Texas. Mr. Sharman also presently serves as President and Director of ILM II. He has a Bachelor of Science degree from the University of Notre Dame. (e) None of the current Directors and Officers was involved in legal proceedings which are material to an evaluation of his or her ability or integrity as a Director or Officer. On May 8, 1998, Andrew A. Feldman and Jeri Feldman, as Trustees for the Andrew A. & Jeri Feldman Revocable Trust dated September 18, 1990, commenced a purported class action on behalf of that trust and all other shareholders of ILM I and ILM II (affiliates of the Company, as previously discussed) in the Supreme Court of the State of New York, County of New York, naming as defendants ILM I, ILM II and Lawrence A. Cohen, Jeffry R. Dwyer, Julien G. Redele, Carl J. Schramm and J. William Sharman, Jr. as the directors of both corporations. The class action complaint alleged that the directors engaged in wasteful and oppressive conduct and breached fiduciary duties in preventing the sale or liquidation of the assets of ILM I and ILM II, diverting certain of their assets. The complaint sought compensatory damages in an unspecified amount, punitive damages, the judicial dissolution of ILM I and ILM II, an order requiring the directors to take all steps to maximize shareholder value, including either an auction or liquidation, and rescinding certain agreements, and attorney's fees. On July 8, 1998, the defendants moved to dismiss the complaint on all counts. On October 15, 1999, the parties entered into a Stipulation of Settlement and filed it with the Court, which approved the settlement, by order dated October 21, 1999. In issuing that order the Court entered a final judgment dismissing the action and all non-derivative claims of the settlement class against the defendants with prejudice. This litigation was settled at no cost to ILM II and ILM I. As part of the settlement, CSLC increased its proposed merger consideration payable to the ILM II and ILM I shareholders and was also responsible for a total of approximately $1.1 million in plaintiffs' attorneys fees and expenses if the proposed mergers were consummated. If ILM II were to consummate an extraordinary transaction with a third party, then ILM II would be responsible for its share of the plaintiffs' attorneys fees and expenses. (f) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the Officers and Directors of the Company, and persons who own more than ten percent of the Company's outstanding common stock, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and ten-percent beneficial holders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Company believes that, during the year ended August 31, 2001, there was compliance with all filing requirements applicable to its Officers and Directors and ten-percent beneficial holders. III-2 ILM II LEASE CORPORATION ITEM 11. EXECUTIVE COMPENSATION The Company's Directors each receive annual compensation of $12,000 plus $500 for attending each Board of Directors meeting and reimbursement for expenses incurred in attending meetings and as a result of other work performed for the Company. Officers of the Company are not compensated. Jeffry R. Dwyer receives compensation from and is a shareholder of Greenberg Traurig, which acts as Counsel to the Company and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) As of the date hereof, no person of record owns or is known by the Company to own beneficially more than five percent of the outstanding shares of common stock of the Company. (b) The Directors and Officers of the Company do not have any direct or indirect ownership of shares of the Company's common stock as of the date hereof. (c) There exists no arrangement, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Jeffry R. Dwyer, President, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2001 and 2000, Greenberg Traurig earned fees from the Company of $134,000 and $34,000, respectively. III-3 ILM II LEASE CORPORATION PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) and (2) Financial Statements and Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. (3) EXHIBITS: The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this Report. (b) The Company filed a Current Report on Form 8-K dated June 8, 2001, reporting that the Company engaged PricewaterhouseCoopers LLP as its independent accountants effective June 12, 2001. (c) Exhibits: See (a)(3) above. (d) Financial Statement Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. IV-1 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. ILM II LEASE CORPORATION By: /S/ JEFFRY R. DWYER ---------------------------------------- Jeffry R. Dwyer President (Principal Accounting Officer) Dated: NOVEMBER 28, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacity and on the dates indicated. By: /S/ JEFFRY R. DWYER Date: NOVEMBER 28, 2001 --------------------------- ----------------------------- Jeffry R. Dwyer Director By: /S/ JULIEN G. REDELE Date: NOVEMBER 28, 2001 --------------------------- ----------------------------- Julien G. Redele Director By: /S/ J. WILLIAM SHARMAN, JR. Date: NOVEMBER 28, 2001 --------------------------- ----------------------------- J. William Sharman, Jr. Director IV-2 ILM II LEASE CORPORATION ANNUAL REPORT ON FORM 10-K ITEM 14(a)(3) ILM II LEASE CORPORATION INDEX TO EXHIBITS
PAGE NUMBER IN THE EXHIBIT NO. DESCRIPTION OF DOCUMENT REPORT OR OTHER REFERENCE - ----------- ----------------------- ------------------------- (3) and (4) Registration Statement on Form 10 of Filed with the Commission pursuant the Registrant dated July 20, 1995, to Rule 424(c) and inccorporated as supplemented herein by reference (13) Annual Reports to Shareholders No Annual Report for the year ended August 31, 2001 has been sent to the Shareholders. An Annual Report will be sent to the Shareholders subsequent to this filing.
IV-3 ILM II LEASE CORPORATION ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) AND (2) AND 14(d) ILM II LEASE CORPORATION INDEX TO FINANCIAL STATEMENTS
REFERENCE ILM II LEASE CORPORATION: Report of PricewaterhouseCoopers LLP, Independent Accountants F-2 Report of Ernst & Young LLP, Independent Auditors F-3 Statement of Net Assets in Liquidation at August 31, 2001 F-4 Balance Sheet at August 31, 2000 F-5 Statements of Operations for the years ended August 31, 2001, 2000 and 1999 F-6 Statements of Changes in Shareholders' Equity for the years ended August 31, 2001, 2000 and 1999 F-7 Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999 F-8 Notes to Financial Statements F-9
Financial statement schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto. F-1 ILM II LEASE CORPORATION REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of ILM II Lease Corporation: In our opinion, the accompanying statement of net assets in liquidation and the related statements of operations, shareholders' equity and cash flows presents fairly, in all material respects, the net assets in liquidation of ILM II Lease Corporation (the "Company") at August 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company adopted a plan of liquidation on August 31, 2001, and as a result changed its basis of accounting as of August 31, 2001, and for periods subsequent to August 31, 2001, from the going-concern basis to the liquidation basis of accounting. PricewaterhouseCoopers LLP Boston, Massachusetts November 26, 2001 F-2 ILM II LEASE CORPORATION NOTE: ERNST & YOUNG TO PROVIDE OPINION REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Shareholders of ILM II Lease Corporation: We have audited the accompanying balance sheet of ILM II Lease Corporation as of August 31, 2000, and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assisting the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ILM II Lease Corporation at August 31, 2000, and the results of its operations and its cash flows for each of the two years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. ERNST & YOUNG LLP Dallas, Texas October 24, 2000 except for Note 1, as to which the date is November 28, 2000 See accompanying notes. F-3 ILM II LEASE CORPORATION STATEMENT OF NET ASSETS IN LIQUIDATION (LIQUIDATION BASIS) August 31, 2001 (Dollars in thousands, except per share data)
2001 ---- ASSETS Cash and cash equivalents $ 931 Accounts receivables, net 108 Tax refund receivable - federal and state 346 Prepaid taxes and other assets 460 Deposits 9 Deferred tax asset, net 128 ------- $ 1,982 ======= LIABILITIES LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 633 Accrued liquidation expenses 412 Real estate taxes payable 314 Accounts payable - related party 353 Security deposits 49 ------- Total current liabilities 1,761 Commitments and contingencies Net assets in liquidation $ 221 =======
See accompanying notes. F-4 ILM II LEASE CORPORATION BALANCE SHEET AUGUST 31, 2000 (GOING-CONCERN BASIS) (Dollars in thousands, except per share data)
2000 ---- ASSETS Cash and cash equivalents $ 1,894 Accounts receivables, net 21 Accounts receivable - related party 40 Accounts receivable - Capital Senior Living Corporation 39 State tax refund receivable 21 Prepaid taxes and other assets 58 ------- Total current assets 2,073 Furniture, fixtures and equipment 1,604 Less: accumulated depreciation (1,153) ------- 451 Deposits 9 Deferred tax asset, net 12 ------- $ 2,545 ======= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 542 Federal income taxes payable 276 Real estate taxes payable 305 Accounts payable - related party 378 Security deposits 36 ------- Total current liabilities 1,537 Deferred rent payable 6 ------- Total liabilities 1,543 Commitments and contingencies Shareholders' equity: Common stock, $0.01 par value, 20,000,000 shares authorized, 5,180,952 shares issued and outstanding 52 Additional paid-in capital 448 (Accumulated deficit) Retained earnings 502 ------- Total shareholders' equity 1,002 ------- $ 2,545 =======
See accompanying notes. F-5 ILM II LEASE CORPORATION STATEMENTS OF OPERATIONS (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data)
2001 2000 1999 ---- ---- ---- Revenue: Rental and other $ 14,148 $ 16,562 $ 16,232 Interest 32 43 18 --------- --------- --------- 14,180 16,605 16,250 Expenses: Facilities lease rent 4,555 5,401 5,265 Dietary, salaries, wages and food service 2,541 2,820 2,740 Administrative salaries and wages 1,307 1,425 1,196 Marketing salaries and wages 684 722 705 Utilities 983 1,024 1,062 Repairs and maintenance 549 634 636 Real estate taxes 481 603 527 Property management fees 656 903 980 Other property operating expenses 1,306 1,483 1,433 General and administrative 614 391 228 Directors compensation 61 62 51 Professional fees 493 291 223 Depreciation 811 635 293 --------- --------- --------- 15,041 16,394 15,339 --------- --------- --------- Operating (loss) income before income taxes (861) 211 911 Liquidation expense 412 - - --------- --------- --------- (Loss) income before income taxes (1,273) 211 911 Income tax expense (benefit): Current (377) 333 226 Deferred (115) 142 116 --------- --------- --------- (492) 475 342 --------- --------- --------- NET (LOSS) INCOME $ (781) $ (264) $ 569 ========= ========= ========= NET (LOSS) INCOME PER SHARE OF COMMON STOCK $ (0.15) $ (0.05) $ 0.10 ========= ========= =========
The above net income (loss) per share of common stock is based upon the weighted average number of shares outstanding for the years ended August 31, 2001, 2000 and 1999, of 5,180,952. See accompanying notes. F-6 ILM II LEASE CORPORATION STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (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, 1998 5,180,952 $52 $448 $ 197 $ 697 Net income - - - 569 569 --------- --- ---- ----- ----- BALANCE AT AUGUST 31, 1999 5,180,952 52 448 766 1,266 Net loss - - - (264) (264) ---------- --- ------ ------- ------ BALANCE AT AUGUST 31, 2000 5,180,952 52 448 502 1,002 Net loss - - - (781) (781) ---------- --- ------ ------- ------ BALANCE AT AUGUST 31, 2001 5,180,952 $52 $448 $(279) $ 221 ========= === ====== ======== ======
See accompanying notes. F-7 ILM II LEASE CORPORATION STATEMENTS OF CASH FLOWS (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (In thousands)
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net (loss) income $ (781) $ (264) $ 569 Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation expense 811 635 293 Deferred tax expense (benefit), net (116) 142 116 Changes in assets and liabilities: Accounts receivable, net (87) 59 9 Accounts receivable - related party 40 10 52 Accounts receivable- Capital Senior Living Corporation 39 (39) - Federal & state tax refund receivable (325) - 137 Prepaid taxes and other assets (402) 294 (302) Accounts payable and accrued expenses 91 (83) (164) Accrued liquidation expense 412 - - Federal income taxes payable (276) 49 226 Accounts payable - related party (25) 41 50 Termination fee payable - - (650) Real estate taxes payable 9 75 21 Security deposits 13 (13) 24 Deferred rent payable (6) (31) (39) ------- ------- ------ Net cash (used in) provided by operating activities (603) 876 342 ------- ------- ------ Cash flows from investing activity: Additions to furniture, fixtures and equipment (360) (469) (352) ------ ------- ------ Net cash used in investing activities (360) (469) (352) ------ ------- ------ Net increase (decrease) in cash and cash equivalents (963) 407 (10) Cash and cash equivalents, beginning of year 1,894 1,487 1,497 ------ ------- ------ Cash and cash equivalents, end of year $ 931 $ 1,894 $1,487 ====== ======= ====== SUPPLEMENTAL DISCLOSURE: Cash paid during the period for federal income taxes $ 180 $ 231 $ - ====== ====== ====== Cash paid during the period for state income taxes $ 43 $ 57 $ 5 ====== ======= ======
See accompanying notes. F-8 ILM II LEASE CORPORATION Notes to Financial Statements 1. NATURE OF OPERATIONS AND PLAN OF LIQUIDATION ILM II Lease Corporation ("the Company") was organized as a corporation on September 12, 1994 under the laws of the state of Virginia. Through August 31, 1995, the Company had no significant operations. The Company was formed by ILM II Senior Living, Inc. ("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 ("the Facilities Lease Agreement"). ILM II initially 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 majority-owned, indirect subsidiaries of ILM II, subject to the mortgage loans. Subsequently, the indirect subsidiaries of ILM II were merged into ILM II Holding, Inc. ("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. As discussed further in Note 6, the management agreement with AHC was terminated in July 1996. ILM II has elected to qualify and be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended ("the Code"), for each taxable year of operations. In order to maintain its status as a REIT, 75% of ILM II's annual gross income must be Qualified Rental Income as defined by the Code. The rent paid by the residents of the Senior Housing Facilities likely would not be deemed to be Qualified Rental Income because of the extent of services provided to residents. Consequently, the operation of the Senior Housing Facilities by ILM II or its subsidiaries over an extended period of time could adversely affect ILM II's status as a REIT. Therefore, ILM II formed the Company to operate the Senior Housing Facilities, and by means of a distribution, transferred the ownership of the common stock of the Company to the holders of ILM II common stock on September 1, 1995 (see Note 4). Because the Company, which is taxed as a so-called "C" corporation, is no longer a subsidiary of ILM II, it can receive service-related income without endangering the REIT status of ILM II. The Company's sole business is the operations of the Senior Housing Facilities. The Company leases the Senior Housing Facilities from ILM II Holding, which is now a subsidiary of ILM II that holds title to the Senior Housing Facilities, pursuant to the Facilities Lease Agreement. The lease is accounted for as an operating lease in the Company's financial statements. In July 1996, following the 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. F-9 ILM II LEASE CORPORATION 1. NATURE OF OPERATIONS AND PLAN OF LIQUIDATION (CONTINUED) On February 7, 1999, ILM II entered into an agreement and plan of merger with CSLC, the corporate parent of Capital. In connection with the proposed merger, the Company received notice from ILM II Holding indicating that the Facilities Lease Agreement would terminate on the date of consummation of the merger of ILM II and CSLC. The Facilities Lease Agreement 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 ILM II sold the Senior Housing facility to CSLC. The Facilities Lease Agreement was originally scheduled to expire on December 31, 2000. In November 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 was consummated or March 31, 2001, and on a month-to-month basis thereafter if the merger were not consummated by that time. On February 8, 2001, ILM II received notice from CSLC terminating the merger agreement. As a result, the Facilities Lease Agreement is currently on a month-to-month basis. ILM II's existing corporate finite life is scheduled to expire on December 31, 2001. On July 6, 2001, ILM II's Board of Directors recommended to its shareholders that ILM II's Articles of Incorporation be amended to extend ILM II's finite-life existence from December 31, 2001, until December 31, 2008. On August 16, 2001, at ILM II's Annual Meeting of Shareholders, the proposal was not approved by the shareholders. As a result, ILM II announced that it will liquidate the Senior Housing Facilities commencing not later than December 31, 2001. The Company does not have any current plans to operate or own any other facilities or engage in any other business outside of its relationship with ILM II. Accordingly, upon the liquidation of the Senior Housing Facilities and the resulting termination of the Facilities Lease Agreement, the Company will carry out a plan of liquidation. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. It is currently expected that the Company will have nominal value after payment of its expenses. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES In connection with its adoption of a plan of liquidation as of August 31, 2001, the Company adopted the liquidation basis of accounting which, among other things, requires that assets and liabilities be stated at their estimated net realizable value and that estimated costs of liquidating the Company be provided to the extent that they are reasonably determinable. As of August 31, 2001, the Company adopted a plan of liquidation and recorded accrued expenses of $412,000. These costs include estimates of insurance ($193,000), and other costs ($219,000) such as legal fees, accounting fees, tax preparation and filing fees and other professional services. The actual costs could vary from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution of the Company. F-10 ILM II LEASE CORPORATION 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. Key estimates include the estimate of liquidation expenses. Actual results, therefore, could differ from those estimates. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment are carried at the lower of cost, reduced by accumulated depreciation, or fair value in accordance with FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." Depreciation expense was provided on a straight-line basis using an estimated useful life of 3 to 5 years until 1998, when the Company changed the estimated useful lives of its assets to the lease termination date of December 31, 2000, as such assets are not subject to repurchase by ILM II Holding upon lease expiration or termination. Since December 31, 2000, such assets are charged to expense in the month purchased. REVENUE Units at the Senior Housing Facilities are generally rented for terms of twelve months or less. The base rent charged varies depending on the unit size, with added fees collected for more than one occupant per unit and for assisted living services. Included in the amount of base rent charged are certain meals, housekeeping, medical and social services provided to the residents of each Senior Housing Facility. RENT EXPENSE The Company rents the Senior Housing Facilities from ILM II Holding pursuant to a month-to-month operating lease. Rent expense is recognized on a straight-line basis over the term of the lease agreement. Deferred rent payable represented the difference between rent expense recognized on a straight-line basis and cash paid for rent pursuant to the terms of the Facilities Lease Agreement. ADVERTISING EXPENSE The Company's policy is to expense all advertising costs as incurred. For the years ended August 31, 2001, 2000 and 1999, advertising expenses were $684,000, $722,000 and $705,000, respectively. INCOME TAX EXPENSE Income tax expense is provided for using the liability method as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less. F-11 ILM II LEASE CORPORATION 3. PROPERTY MANAGEMENT AGREEMENT 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. The term of the Management Agreement originally expired on July 29, 2001 but, in November 2000, the term was modified to be coterminous with the Facilities Lease Agreement. As a result, the term of the Management Agreement is currently being extended on a month-to-month basis. Under the Management Agreement, Capital generally is required to perform all operational functions necessary to operate the Senior Housing Facilities other than certain administrative functions. The functions performed by Capital include periodic reporting to and coordinating with the Company, leasing the individual units in the Senior Housing Facilities, maintaining bank accounts, maintaining books and records, advertising and marketing the Senior Housing Facilities, hiring and supervising on-site personnel, and performing maintenance. 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, beginning on August 31, 1997, the base amount is increased based on the percentage increase in the Consumer Price Index as well as 15% of Facility expansion costs. ILM II has guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. For the years ended August 31, 2001, 2000 and 1999, Capital earned property management fees from the Company of $656,000, $903,000 and $980,000, respectively. 4. RELATED PARTY TRANSACTIONS Jeffry R. Dwyer, President, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2001 and 2000, Greenberg Traurig earned fees from the Company of $134,000 and $34,000, respectively. There were no ACCOUNTS RECEIVABLE - RELATED PARTY at August 31, 2001. ACCOUNTS RECEIVABLE - RELATED PARTY at August 31, 2000 includes $40,000 in expense reimbursements due from Holding II for capital expenditures at the Senior Housing Facilities. Accounts Receivable - Capital Senior Living Corporation at August 31, 2001 and 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 August 31, 2001, includes $247,000 in variable rent due to ILM II Holding and the remainder in accrued legal fees due to Greenberg Traurig, a related party. Accounts payable - related party at August 31, 2000 primarily includes $356,000 for variable rent due to ILM II Holding. 5. CAPITAL STOCK Prior to September 1, 1995, the Company was a wholly-owned subsidiary of ILM II. Pursuant to a reorganization and distribution agreement, ILM II capitalized the Company with $500,000, an amount estimated to provide the Company with necessary working capital. On September 1, 1995, MAVRICC Management Systems, Inc., as the distribution agent, caused to be issued on the stock records of the Company the distributed Common Stock of the Company, in uncertificated form, to the holders of record of ILM II Common Stock at the close of business on July 14, 1995. One share of the Company's Common Stock was distributed for each outstanding share of ILM II Common Stock. No certificates or scrip representing fractional shares of the Company's Common Stock were issued to holders of ILM II Common Stock as part of the distribution. In lieu of receiving fractional shares, each holder of ILM II Common Stock who would otherwise have been entitled to receive a fractional share of the Company's Common Stock received a cash payment equivalent to $0.14 per share for such fractional interest. F-12 ILM II LEASE CORPORATION 6. THE FACILITIES LEASE AGREEMENT ILM II Holding (the "Lessor"), a direct subsidiary of ILM II, 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 ILM II sold its interest in the Senior Housing facility to CSLC. In November 2000, the Facilities Lease Agreement was extended through the earlier of the date on which the merger of ILM II with CSLC was consummated or March 31, 2001, and on a month-to-month basis thereafter if the merger were not consummated by that time. On February 8, 2001, ILM II received notice from CSLC terminating the merger agreement. The lease is accounted for as an operating lease in the Company's financial statements. ILM II's existing corporate finite life is scheduled to expire on December 31, 2001. Upon such expiration, the Facilities Lease Agreement is expected to continue on a month-to-month basis until it is terminated as a result of the expected sale of the Senior Housing Facilities. Although ILM II recommended to its shareholders that its finite life existence be extended, the ILM II shareholders did not approve the proposal to extend ILM II's corporate finite life at their Annual Meeting on August 16, 2001. Accordingly, ILM II announced that, pursuant to its Articles of Incorporation, ILM II will liquidate its properties commencing not later than December 31, 2001. Descriptions of the properties covered by the Facilities Lease Agreement between the Company and ILM II Holding at August 31, 2001, are summarized as follows:
YEAR RENTABLE RESIDENT NAME LOCATION FACILITY BUILT UNITS (1) CAPACITIES (1) - ---- -------- -------------- --------- -------------- 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 (2) Santa Barbara, CA
(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. (2) The Facilities Lease Agreement with respect to Villa Santa Barbara was terminated on August 15, 2000, upon the sale of ILM II's interest in Villa Santa Barbara. F-13 ILM II LEASE CORPORATION 6. THE FACILITIES LEASE AGREEMENT (CONTINUED) Pursuant to the Facilities Lease Agreement, the Company paid annual base rent for the use of all of the Senior Housing Facilities in the aggregate amount of $3,555,427 ($3,995,586 and $4,035,600 per year in 2000 and 1999, respectively). The reduction in base rent from the previous years 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. 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. 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 Senior Housing Facility in an amount equal to 40% of the excess of the aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $13,021,000 through August 15, 2000, when the lease with respect to Villa Santa Barbara was terminated. 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). For the fiscal years ended August 31, 2001 and 2000, variable rent expense was $1,006,000 and $1,437,000, respectively. The Company's use of the properties is limited to use as a Senior Housing Facility. The Company has responsibility to obtain and maintain all licenses, certificates and consents needed to use and operate each 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. Also, various health and safety regulations and standards which are enforced by state and local authorities apply to the operation of all of 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. 7. LEGAL PROCEEDINGS AND CONTINGENCIES The Company has pending claims incurred in the normal course of business which, in the opinion of the Company's management, will not have a material effect on the financial statements of the Company. 8. CONSTRUCTION LOAN FINANCING ILM II and the Company obtained a construction loan facility during 1999 that provided ILM II with up to $8.8 million to fund the capital costs of the potential expansion programs. The construction loan facility was collateralized by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such properties. The Company was a co-borrower on the construction loan. On April 3, 2001, the remaining $570,000 principal balance on the construction loan facility plus accrued interest was repaid by ILM II. Amounts outstanding under the construction loan facility at May 31, 2001 and August 31, 2000 were $0 and $570,000, respectively. F-14 ILM II LEASE CORPORATION 9. FEDERAL INCOME TAXES The Company is taxable as a so-called "C" corporation and, therefore, its income is subject to tax at the federal and state levels. The Company reports on a calendar year for tax purposes. Income taxes at the appropriate statutory rates have been provided for in the accompanying financial statements. Deferred income tax benefit reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred tax assets and liabilities as of August 31, 2001 and 2000, are comprised of the following amounts (in thousands):
2001 2000 ---- ---- Deferred tax asset - straight-line rent expense $ - $ 3 Deferred tax asset - book over tax depreciation 643 332 Deferred tax asset - book over tax amortization 3 9 ------ ------ Gross deferred tax asset 646 344 Valuation allowance (518) (332) ----- ----- Gross deferred tax asset $ 128 $ 12 ====== ======
The components of income tax expense (benefit) for fiscal 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999 ---- ---- ---- Current: Federal $(320) $276 $ - State (57) 57 - ----- ---- ---- Total current (377) 333 - ----- ---- ---- Deferred: Federal (98) 122 293 State (17) 20 49 ----- ---- ---- Total deferred (115) 142 342 ----- ---- ---- $(492) $475 $342 ===== ==== ====
During the fourth quarter of fiscal year 2001, the Company recorded income tax expense of $186,000 to record a valuation allowance of $518,000 against deferred tax assets that are not expected to be recovered due to the termination of the Facilities Lease Agreement. The remaining deferred tax asset is expected to be realized through the carryback of net operating losses upon the termination of the Facilities Lease Agreement and the write off of fixed assets. The reconciliation of income tax computed for fiscal 2001, 2000 and 1999, at U.S. federal statutory rates to income tax expense (benefit) is as follows (in thousands):
2001 2000 1999 - ------------------------------------ ------------------- ----------------- ------------------- Tax at U.S. statutory rates $(433) 34% $ 72 34% $293 34% State income taxes, net of federal (76) 6% 13 6% 49 6% tax benefit Valuation allowance 186 15% 332 158% - 0% Other (169) 7% 58 27% - 0% ------ ---- ---- ----- ----- ---- $(492) 62% $475 225% $342 40% ====== ==== ==== ===== ===== ====
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