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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 MAY 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
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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
-------------------------------------
(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 May 31, 2001: 5,180,952.
Page 1 of 20
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ILM II LEASE CORPORATION
INDEX
Part I. Financial Information PAGE
Item 1. Financial Statements
Balance Sheets
May 31, 2001 (Unaudited) and August 31, 2000.................................................4
Statements of Operations
For the nine months and three months ended May 31, 2001 and 2000
(Unaudited).............................................................................5
Statements of Changes in Shareholders' Equity
For the nine months ended May 31, 2001 and 2000 (Unaudited)..................................6
Statements of Cash Flows
For the nine months ended May 31, 2001 and 2000 (Unaudited)..................................7
Notes to Financial Statements (Unaudited).................................................8-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....13-18
Part II. Other Information...................................................................................19
Item 6. Exhibits and Reports on Form 8-K............................................................19
Signatures....................................................................................................20
-2
ILM II LEASE CORPORATION
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
(See next page)
-3-
ILM II LEASE CORPORATION
BALANCE SHEETS
May 31, 2001 (Unaudited) and August 31, 2000
(Dollars in thousands, except per share data)
ASSETS
May 31, August 31,
2001 2000
---------- ----------
Cash and cash equivalents $ 1,425 $ 1,894
Accounts receivable, net 53 21
Accounts receivable - related party 69 40
Accounts receivable - Capital Senior Living Corporation - 39
Prepaid expenses and other assets 151 58
State tax refund receivable 21 21
---------- ----------
Total current assets 1,719 2,073
Furniture, fixtures and equipment 1,810 1,604
Less: accumulated depreciation (1,810) (1,153)
---------- ----------
- 451
Deposits 9 9
Deferred tax asset, net - 12
----------- ----------
$ 1,728 $ 2,545
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 551 $ 542
Accounts payable - related party 287 378
Real estate taxes payable 229 305
Federal income taxes payable 96 276
Security deposits 43 36
---------- ----------
Total current liabilities 1,206 1,537
Deferred rent payable - 6
---------- ----------
Total liabilities 1,206 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 22 502
---------- ---------
Total shareholders' equity 522 1,002
---------- ---------
$ 1,728 $ 2,545
========== =========
See accompanying notes.
-4-
ILM II LEASE CORPORATION
STATEMENTS OF OPERATIONS
For the nine and three months ended May 31, 2001 and 2000 (Unaudited)
(Dollars in thousands, except per share data)
Nine Months Ended Three Months Ended
---------------------------- ----------------------------
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
------------- ------------ ------------ ------------
REVENUES
Rental and other income $10,622 $12,469 $3,501 $4,162
Interest income 28 29 9 10
------------- ------------ ------------ ------------
10,650 12,498 3,510 4,172
EXPENSES
Master lease rent expense 3,419 4,084 1,126 1,364
Dietary and food service salaries, wages and expenses 1,901 2,102 649 706
Administrative salaries, wages and expenses 930 1,097 358 457
Marketing salaries, wages and expenses 486 542 171 188
Utilities 676 748 239 235
Repairs and maintenance 405 468 146 160
Real estate taxes 355 394 120 131
Property management fees 558 739 149 213
Other property operating expenses 962 1,101 332 373
General and administrative 441 292 128 106
Directors compensation 41 45 17 14
Professional fees 287 221 66 44
Depreciation expense 657 366 97 122
------------- ------------ ------------ ------------
11,118 12,199 3,598 4,113
------------- ------------ ------------ ------------
(Loss) income before taxes (468) 299 (88) 59
Income tax expense:
Current - 23 - 17
Deferred 12 79 - -
------------- ------------ ------------ ------------
12 102 - 17
------------- ------------ ------------ ------------
NET (LOSS) INCOME $ (480) $ 197 $ (88) $ 42
============= ============ ============ ============
Basic (loss) earnings per share of common stock $ (0.09) $ 0.04 $ (0.02) $ 0.01
============= ============ ============ ============
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 nine months ended May 31, 2001 and 2000 (Unaudited)
(Dollars in thousands, except per share data)
Common Stock
$.01 Par Value Additional
------------------------------ Paid-In Accumulated -------------
Shares Amount Capital Deficit Total
--------------- ---------- -------------- ----------------- -------------
Balance at August 31, 1999 5,180,952 $52 $448 $ 766 $1,266
Net income - - 197 176
--------------- ---------- -------------- ----------------- -------------
Balance at May 31, 2000 5,180,952 $52 $448 $ 963 $1,463
=============== ========== ============== ================= =============
Balance at August 31, 2000 5,180,952 $52 $448 $ 502 $1,002
Net loss - - - (480) (480)
--------------- ---------- -------------- ----------------- -------------
Balance at May 31, 2001 5,180,952 $ 52 $448 $ 22 $ 522
=============== ========== ============== ================= =============
See accompanying notes.
-6-
ILM II LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 2001 and 2000 (Unaudited)
(Dollars In thousands)
Nine Months Ended
--------------------------------
May 31, May 31,
2001 2000
-------------- --------------
Cash flows from operating activities:
Net (loss) income $ (480) $ 197
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation expense 657 366
Deferred tax expense 12 100
Changes in assets and liabilities:
Accounts receivable, net (32) 17
Accounts receivable - related party (29) 20
Accounts receivable - Capital Senior Living Corporation 39 -
Prepaid expenses and other assets (93) 208
Accounts payable and accrued expenses 9 (76)
Accounts payable - related party (91) 57
Real estate taxes payable (76) (46)
Federal income taxes payable (180) (226)
Deferred rent payable (6) (23)
Security deposits, net 7 13
-------------- --------------
Net cash (used in) provided by operating activities (263) 607
Cash flows from investing activity:
Additions to furniture, fixtures and equipment (206) (231)
-------------- --------------
Net cash used in investing activity (206) (231)
Net (decrease) increase in cash and cash equivalents (469) 376
Cash and cash equivalents, beginning of period 1,894 1,487
-------------- --------------
Cash and cash equivalents, end of period $ 1,425 $ 1,863
============== ==============
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for state income taxes $ 42 $ 278
============== =============
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 accounting principles generally
accepted in the United States of America 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 May 31, 2001, and revenues and expenses for
each of the nine- and three-month periods ended May 31, 2001 and 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 nine- and three-month periods ended May 31, 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")
collateralized 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.
-8-
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited)
TERMINATED AGREEMENT AND PLAN OF MERGER OF ILM II WITH CAPITAL SENIOR
LIVING CORPORATION ("CSLC")
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.
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. Although there can be no assurance,
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.
ILM II's existing corporate finite life is scheduled to terminate on
December 31, 2001. Upon such termination, the Facilities Lease Agreement
will be terminated. Although ILM II has recommended to its shareholders
that its finite life existence be extended, there is no assurance that such
extension will occur.
The Company's operations are not expected to continue beyond the
termination of the Facilities Lease Agreement. Additionally, upon such
termination, it is expected that the Company would have nominal value after
payment of its expenses and other costs, and the Board accordingly would
review the Company's status and continued existence.
-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 $759,000 and $237,000 for the nine- and three-month
periods ended May 31, 2001, compared to $1,081,000 and $363,000 for the
nine-and three-month periods ended May 31, 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)
2. THE FACILITIES LEASE AGREEMENT (CONTINUED)
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 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. Although there can be no
assurance, 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 nine- and three-month periods ended May 31, 2001, Capital earned
property management fees from the Company of $558,000 and $149,000,
respectively. For the nine- and three-month periods ended May 31, 2000,
Capital earned property management fees from the Company of $739,000 and
$213,000, respectively.
Accounts receivable - Capital Senior Living Corporation (CSLC) at
February 28, 2001, included amounts due from CSLC 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
were scheduled to be repaid subsequent to the balance sheet date. On April
3, 2001, the Company, as required by the Facilities Lease Agreement,
assumed approximately $39,000 in liabilities of ILM I Lease Corporation
payable to CSLC. In exchange for CSLC's forgiving the $39,000 liability,
the Company wrote off the Accounts Receivable - CSLC in approximately the
same amount.
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 nine - and three-month periods ended May
31, 2001, and 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.
3. RELATED PARTY TRANSACTIONS
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 nine- and three-month periods ended May 31, 2001,
Greenberg Traurig earned fees from the Company of $68,000 and $26,000
respectively. For the nine- and three-month periods ended May 31, 2000,
Greenberg Traurig earned fees from the Company of $28,000 and $1,700
respectively.
-11-
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
ACCOUNTS RECEIVABLE - RELATED PARTY at May 31, 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 PAYABLE - RELATED PARTY at May 31, 2001, includes
$237,000 for variable rent due to ILM II Holding and $50,000 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.
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 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.
-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 $759,000 and $237,000
for the nine- and three-month periods ended May 31, 2001, compared to $1,081,000
and $363,000 for the nine-and three-month periods ended May 31, 2000.
ILM II's existing corporate finite life is scheduled to terminate on
December 31, 2001. Upon such termination, the Facilities Lease Agreement will be
terminated. Although ILM II has recommended to its shareholders that its finite
life existence be extended, there is no assurance that such extension will
occur.
The Company's operations are not expected to continue beyond the termination
of the Facilities Lease Agreement. Additionally, upon such termination, it is
expected that the Company would have nominal value after payment of its expenses
and other costs, and the Board accordingly would review the Company's status and
continued existence.
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. Although there can be no assurance, 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 86% and 92% for the nine-month periods ended May
31, 2001 and 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 May 31, 2001, the Company had cash and cash equivalents of $1,425,000
compared to $1,894,000 at August 31, 2000. This decrease in cash of $469,000 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 three 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
NINE MONTHS ENDED MAY 31, 2001, VERSUS NINE MONTHS ENDED MAY 31, 2000
OVERVIEW OF PROPERTY OPERATIONS
REVENUES
Total revenues were $10,650,000 for the nine months ended May 31, 2001
compared to $12,498,000 for the same period of the prior year, representing a
decrease of $1,848,000 or 14.8%. 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 $11,118,000 for the nine months ended May 31, 2001
compared to $12,199,000 for the same period in the prior year, representing a
decrease of $1,081,000 or 8.9%. This decrease was primarily due to decreases in
facilities lease rent expense of $665,000 or 16.3%; dietary and food service
salaries, wages and expenses of $201,000 or 9.6%; administrative salaries and
expenses of $167,000 or 15.2%; marketing salaries, wages and expenses of $56,000
or 10.3%; utilities of $72,000 or 9.6%; repairs and maintenance of $63,000 or
13.5%; and property management fees of $181,000 or 24.5%. These decreases in
expenses were offset by increases in general and administrative costs of
$149,000 or 51.0%; professional fees of $66,000 or 29.9%; and depreciation
expense of $291,000 or 79.5%. 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 the Company's interest in 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 the Company's
interest in 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, along with an increase of
$39,000 to cover the Company's assumption of ILM I Lease Corporation's
obligations with regard to Villa Santa Barbara, as required by the Facilities
Lease Agreement. The increase in depreciation expense is due to the change in
the estimated useful lives of the Company's fixed assets as a consequence of the
expected lease termination. 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 $90,000 or 88.2% as compared to the
same period in the prior year, as a result of a decrease in income before taxes
of $767,000 or 256.5%, from income before taxes of $299,000 as of May 31, 2000
to a loss before taxes of $468,000 as of May 31, 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
$677,000 or 343.7% from income of $197,000 for the nine months ended May 31,
2000 to net loss of $480,000 for the nine months ended May 31, 2001.
-15-
ILM II LEASE CORPORATION
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:
Nine Months Ended May 31
--------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 Change
------------------------------------------------ ---------- ---------- ----------
Property revenue 10,622 10,548 0.7 %
Property expenses 6,474 6,277 3.1 %
----- ----- -----
Net operating income from property operations 4,148 4,271 (2.9)%
===== ===== ======
Average occupancy level 86.4% 92.0% (6.2)%
Average monthly rent per apartment unit 1,941 1,809 7.3 %
Growth in same-store property revenue was approximately 0.7% for the nine
month period ended May 31, 2001 when compared to the same period ended May 31,
2000. Rental rate increases averaging 7.3% offset the results of lower occupancy
levels and accounted for the entire increase. Growth in same-store property
expenses was due to growth in generally all property expense categories and
particularly administration, utilities, and insurance. The average same-store
occupancy level at May 31, 2001 was 86.4% compared to 92.0% at May 31, 2000.
-16-
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
THREE MONTHS ENDED MAY 31, 2001, VERSUS THREE MONTHS ENDED MAY 31, 2000
REVENUES
Total revenues were $3,510,000 for the three months ended May 31, 2001
compared to $4,172,000 for the same period of the prior year, representing a
decrease of $662,000 or 15.9%. 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 $3,598,000 for the three months ended May 31, 2001
compared to $4,113,000 for the same period in the prior year, representing a
decrease of $515,000 or 12.5%. This decrease was primarily due to decreases in
facilities lease rent expense of $238,000 or 17.4%; administrative salaries and
expenses of $99,000 or 21.7%; other property operating expenses of $41,000 or
11.0%; property management fees of $64,000 or 30.0%; depreciation expense of
$25,000 or 20.5%; and general and administrative costs of $22,000 or 20.8%.
These decreases in expenses were offset by increases in professional fees of
$22,000 or 50.0% and minor increases and decreases in certain other accounts.
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 the Company's interest in 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 the Company's interest in 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, along with an increase of $39,000 to cover the
Company's assumption of ILM I Lease Corporation's obligations with regard to
Villa Santa Barbara, as required by the Facilities Lease Agreement. 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. 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 $17,000 or 100.0% as compared to the
same period in the prior year, as a result of a decrease in income before taxes
of $147,000 or 249.2%, from income before taxes of $59,000 as of May 31, 2000 to
loss before taxes of $88,000 as of May 31, 2001.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$130,000 or 309.5% from net income of $42,000 for the three months ended May 31,
2000 to net loss of $88,000 for the three months ended May 31, 2001.
-17-
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.
-18-
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
-19-
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: JULY 12, 2001
-20-