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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
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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)
<Caption>
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%
====== ==== ==== ===== ===== ====
F-15