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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
__ SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED FEBRUARY 28, 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
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ILM II LEASE CORPORATION
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(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
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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
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(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
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Shares of common stock outstanding as of February 28, 2001: 5,180,952.
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Page 1 of 19
ILM II LEASE CORPORATION
INDEX
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets
February 28, 2001 (Unaudited) and August 31, 2000............................................4
Statements of Income
For the six months and three months ended February 28, 2001 and February 29, 2000
(Unaudited)..................................................................................5
Statements of Changes in Shareholders' Equity
For the six months ended February 28, 2001 and February 29, 2000 (Unaudited).................6
Statements of Cash Flows
For the six months ended February 28, 2001 and February 29, 2000 (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
February 28, 2001 (Unaudited) and August 31, 2000
(Dollars in thousands, except per share data)
ASSETS
FEBRUARY 28, 2001 AUGUST 31, 2000
----------------- ---------------
Cash and cash equivalents $ 1,621 $1,894
Accounts receivable, net 70 21
Accounts receivable - related party 69 40
Accounts receivable - Capital Senior Living Corporation 39 39
Prepaid expenses and other assets 138 58
State tax refund receivable 21 21
------- ------
Total current assets 1,958 2,073
Furniture, fixtures and equipment 1,713 1,604
Less: accumulated depreciation (1,713) (1,153)
------- ------
- 451
Deposits 9 9
Deferred tax asset, net - 12
------- ------
$1,967 $2,545
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 526 $ 542
Federal income taxes payable 276 276
Real estate taxes payable 181 305
Accounts payable - related party 310 378
Security deposits 43 36
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Total current liabilities 1,336 1,537
Deferred rent payable - 6
------- -------
Total liabilities 1,336 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 131 502
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Total shareholders' equity 631 1,002
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$1,967 $2,545
======= =======
See accompanying notes.
-4-
ILM II LEASE CORPORATION
STATEMENTS OF INCOME
For the six and three months ended
February 28, 2001 and February 29, 2000 (Unaudited)
(Dollars in thousands, except per share data)
SIX MONTHS ENDED THREE MONTHS ENDED
-------------------------- -----------------------------
FEBRUARY 28 FEBRUARY 29 FEBRUARY 28 FEBRUARY 29
2001 2000 2001 2000
------- ------- ------- -------
REVENUES
Rental and other income $ 7,121 $ 8,307 $ 3,573 $ 4,176
Interest income 19 19 9 10
------- ------- ------- -------
7,140 8,326 3,582 4,186
EXPENSES
Master lease rent expense 2,293 2,721 1,155 1,369
Dietary and food service salaries, wages and expenses 1,252 1,396 620 691
Administrative salaries, wages and expenses 573 640 301 324
Marketing salaries, wages and expenses 314 355 167 178
Utilities 436 512 250 251
Repairs and maintenance 259 308 125 145
Real estate taxes 235 263 117 133
Property management fees 409 526 201 272
Other property operating expenses 630 729 312 364
General and administrative 265 168 129 83
Directors compensation 25 31 11 16
Professional fees 206 177 61 80
Depreciation expense 560 244 63 122
------- ------- ------- -------
7,457 8,070 3,512 4,028
------- ------- ------- -------
(Loss) income before taxes (317) 256 70 158
Income tax expense (benefit):
Current 42 -- 28 --
Deferred 12 102 -- 63
------- ------- ------- -------
54 102 28 63
------- ------- ------- -------
NET (LOSS) INCOME $ (371) $ 154 $ 42 $ 95
======= ======= ======= =======
Basic (loss) earnings per share of common stock $ (0.07) $ 0.03 $ 0.01 $ 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 six months ended February 28, 2001 and February 29, 2000 (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 -- -- -- 154 154
--------- --------- --------- --------- ---------
Balance at February 29, 2000 5,180,952 $ 52 $ 448 $ 920 $ 1,420
========= ========= ========= ========= =========
Balance at August 31, 2000 5,180,952 $ 52 $ 448 $ 502 $ 1,002
Net Loss -- -- -- (371) (371)
--------- --------- --------- --------- ---------
Balance at February 28, 2001 5,180,952 $ 52 $ 448 $ 131 $ 631
========= ========= ========= ========= =========
See accompanying notes.
-6-
ILM II LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the six months ended February 28, 2001 and February 29, 2000 (Unaudited)
(Dollars In thousands)
SIX MONTHS ENDED
------------------------------
FEBRUARY 28 FEBRUARY 29
2001 2000
---- ----
Cash flows from operating activities:
Net (loss) income $ (371) $ 154
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation expense 560 244
Deferred tax expense 12 102
Changes in assets and liabilities:
Accounts receivable, net (49) (20)
Accounts receivable - related party (29) 20
Prepaid expenses and other assets (80) 138
Accounts payable and accrued expenses (16) (101)
Accounts payable - related party (68) 63
Real estate taxes payable (124) (177)
Federal income taxes payable -- 4
Deferred rent payable (6) (15)
Security deposits, net 7 9
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Net cash (used by) provided by operating activities (164) 421
Cash flows from investing activity:
Additions to furniture, fixtures and equipment (109) (118)
------- -------
Net cash used in investing activities (109) (118)
------- -------
Net (decrease) increase in cash and cash equivalents (273) 303
Cash and cash equivalents, beginning of period 1,894 1,487
------- -------
Cash and cash equivalents, end of period $ 1,621 $ 1,790
======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for state income taxes $ 42 $ 1
======= =======
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 February
28, 2001, and revenues and expenses for each of the six- and three-month periods
ended February 28, 2001 and February 29, 2000. Actual results may differ from
the estimates and assumptions used. Certain numbers in the prior period's
financial statements have been reclassified to conform to the current period's
presentation. The results of operations for the six- and three-month periods
ended February 28, 2001, 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 Commonwealth 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)
TERMINATED AGREEMENT AND PLAN OF MERGER OF ILM II WITH CAPITAL SENIOR LIVING
CORPORATION
On February 7, 1999, ILM II entered into an agreement and plan of
merger, which was amended and restated on October 19, 1999, as subsequently
amended, with CSLC and certain affiliates of CSLC. 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.
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 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. Because the merger agreement was terminated, the Facilities Lease
Agreement is expected to continue on a month-to-month basis.
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 its interest in 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 was consummated or March 31, 2001, and on a month-to-month basis thereafter
if the merger was not consummated by that time. On February 8, 2001, ILM II
received notice from CSLC terminating the merger agreement. Because the merger
agreement was terminated, the Facilities Lease Agreement is expected to continue
on a month-to-month basis. 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 $523,000 and $266,000
for the six- and three-month periods ended February 28, 2001, compared to
$719,000 and $368,000 for the six-and three-month periods ended February 29,
2000.
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 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. Because the merger agreement was terminated, the Facilities Lease
Agreement is expected to continue on a month-to-month basis. (In connection with
the Agreement and Plan of Merger discussed in Note 1, the Management Agreement
with Capital would have been 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. Capital
also earns an incentive management fee equal to 25% of the amount by which the
"net cash flow" of the Senior Housing Facilities, as defined, exceeds a
specified base amount. Each August 31, the base amount is increased based on the
percentage increase in the Consumer Price Index as well as 15% of Senior Housing
Facility expansion costs. ILM II has guaranteed the payment of all fees due to
Capital under the terms of the Management Agreement. For the six- and
three-month periods ended February 28, 2001, Capital earned property management
fees from the Company of $409,000 and $201,000, respectively. For the six- and
three-month periods ended February 29, 2000, Capital earned property management
fees from the Company of $526,000 and $272,000, respectively.
On September 18, 1997, the Company entered into an agreement with
Capital Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansions of several of the Senior
Housing Facilities. Capital Senior Development, Inc. would receive a fee equal
to 7% of the total development costs of these potential expansions if they are
pursued. ILM II Holding would also reimburse the Company for all costs related
to these potential expansions including fees to Capital Senior Development, Inc.
For the six - and three-month periods ended February 28, 2001, and February 29,
2000, Capital Senior Development, Inc. earned no fees from the Company for
managing pre-construction development activities for potential expansions of the
Senior Housing Facilities.
Jeffry R. Dwyer, Secretary, President and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the six- and three-month periods ended February 28, 2001,
Greenberg Traurig earned fees from the Company of $42,000 and $11,000
respectively. For the six- and three-month periods ended February 29, 2000,
Greenberg Traurig earned fees from the Company of $27,000 and $15,000
respectively.
Accounts receivable - related party at February 28, 2001, and August
31, 2000, includes $69,000 and $40,000, respectively, in expense reimbursements
due from ILM II Holding for capital expenditures at the Senior Housing
Facilities. Accounts receivable - Capital Senior Living Corporation at February
28, 2001, 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 which are scheduled to be repaid
subsequent to the balance sheet date. Accounts payable - related party at
February 28, 2001, includes $266,000 for variable rent due to ILM II Holding and
$44,000 in accrued legal fees due to Greenberg Traurig, Counsel to the Company
and a related party. 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 secured 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 secured 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. Amounts outstanding under the construction loan facility were
$570,000 at February 28, 2001.
On March 31, 2001, the remaining $570,000 principal balance on the
construction loan facility plus accrued interest was repaid by ILM II.
-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 "Terminated 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 expense was $523,000
and $266,000 for the six- and three-month periods ended February 28, 2001,
compared to $719,000 and $368,000 for the six-and three-month periods ended
February 29, 2000.
TERMINATED MERGER OF ILM II WITH CAPITAL SENIOR LIVING CORPORATION
On February 7, 1999, ILM II entered into an agreement and plan of
merger, which was amended and restated on October 19, 1999, as subsequently
amended, with CSLC and certain affiliates of CSLC. 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
pending 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 its interest in 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 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. Because the merger agreement was terminated, the Facilities Lease
Agreement is expected to continue on a month-to-month basis.
-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 88% and 92% for the six-month periods ended
February 28, 2001 and February 29, 2000, 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 February 28, 2001, the Company had cash and cash equivalents of
$1,621,000 compared to $1,894,000 at August 31, 2000. This decrease in cash of
$273,000 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 two quarters 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
SIX MONTHS ENDED FEBRUARY 28, 2001, VERSUS SIX MONTHS ENDED FEBRUARY 29, 2000
REVENUES
Total revenues were $7,140,000 for the six months ended February 28,
2001 compared to $8,326,000 for the same period of the prior year, representing
a decrease of $1,186,000 or 14.2%. This decrease is primarily the result of the
sale of the Company's interest in 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 $7,457,000 for the six months ended February 28,
2001 compared to $8,070,000 for the same period in the prior year, representing
a decrease of $613,000 or 7.6%. This decrease was primarily due to decreases in
facilities lease rent expense of $428,000 or 15.7%; dietary and food service
salaries, wages and expenses of $144,000 or 10.3%; administrative salaries and
expenses of $67,000 or 10.5%; utilities of $76,000 or 14.8%; repairs and
maintenance of $49,000 or 15.9%; and property management fees of $117,000 or
22.2%. These decreases in expenses were offset by increases in general and
administrative costs of $97,000 or 57.7%; professional fees of $29,000 or 16.4%;
and depreciation expense of $316,000 or 129.5%. 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 II Holding upon lease expiration or
termination.
INCOME TAX EXPENSE
Income tax expense decreased overall by $48,000 or 47.1% as compared to
the same period in the prior year, as a result of a decrease in income before
taxes of $573,000 or 180.8%, from income before taxes of $256,000 as of February
29, 2000 to a loss before taxes of $317,000 as of February 28, 2001, coupled
with utilization of the net deferred tax asset of $12,000 from the prior period.
NET LOSS
Primarily as a result of the factors noted above, net income decreased
$525,000 or 340.9% from income of $154,000 for the six months ended February 29,
2000 to net loss of $371,000 for the six months ended February 28, 2001.
-15-
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
THREE MONTHS ENDED FEBRUARY 28, 2001, VERSUS THREE MONTHS ENDED FEBRUARY 29,
2000
REVENUES
Total revenues were $3,582,000 for the three months ended February 28,
2001 compared to $4,186,000 for the same period of the prior year, representing
a decrease of $604,000 or 14.4%. 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 $3,512,000 for the three months ended February 28,
2001 compared to $4,028,000 for the same period in the prior year, representing
a decrease of $516,000 or 12.8%. This decrease was primarily due to decreases in
facilities lease rent expense of $214,000 or 15.6%; dietary and food service
salaries, wages and expenses of $71,000 or 10.3%; administrative salaries and
expenses of $23,000 or 7.1%; other property operating expenses of $52,000 or
14.3; property management fees of $71,000 or 26.1%; professional fees of $19,000
or 23.8%; and depreciation expense of $59,000 or 48.4%. These decreases in
expenses were offset by increases in general and administrative costs of $46,000
or 55.4%. 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 decrease 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, coupled
with a transfer of fixed assets to ILM II Holding, Inc and resultant recapture
of depreciation expense totaling approximately $69,000. Pursuant to the terms of
the Facilities Lease Agreement, such assets would revert to ILM II Holding upon
lease expiration or termination.
INCOME TAX EXPENSE
Income tax expense decreased overall by $35,000 or 55.6% as compared to
the same period in the prior year, as a result of a decrease in income before
taxes of $88,000 or 125.7%, from income before taxes of $158,000 as of February
29, 2000 to income before taxes of $70,000 as of February 28, 2001.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$53,000 or 55.8% from net income of $95,000 for the six months ended February
29, 2000 to net income of $42,000 for the three months ended February 28, 2001.
-16-
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.
-17-
ILM II LEASE CORPORATION
PART II-OTHER INFORMATION
ITEM 1. THROUGH 5. NONE
- ------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
None.
-18-
ILM II LEASE CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BY: ILM II LEASE CORPORATION
By: /s/ JEFFRY R. DWYER
--------------------------------
Jeffry R. Dwyer
President
Dated: April 12, 2001
--------------------
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