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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 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 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
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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 November 30, 2001: 5,180,952
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Page 1 of 19
ILM II LEASE CORPORATION
INDEX
PAGE
------
Part I. Financial Information
Item 1. Financial Statements
Statements of Net Assets in Liquidation
November 30, 2001 (Unaudited) and August 31, 2001............................................4
Statement of Changes in Net Assets in Liquidation
For the three months ended November 30, 2001 (Unaudited) and August 31, 2001.................5
Statement of Operations (Going Concern Basis)
For the three months ended November 30, 2000 (Unaudited).....................................6
Statement of Changes in Shareholders' Equity
For the three months ended November 30, 2000 (Unaudited).....................................7
Statement of Cash Flows
For the three months ended November 30, 2000 (Unaudited).....................................8
Notes to Financial Statements (Unaudited).................................................9-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................13-17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................18
Signatures....................................................................................................19
-2-
Part I. Financial Information
Item I. Financial Statements
(See next page)
-3-
ILM II LEASE CORPORATION
STATEMENTS OF NET ASSETS IN LIQUIDATION
(Liquidation Basis)
November 30, 2001 (Unaudited) and August 31, 2001
(Dollars in thousands, except per share data)
NOVEMBER 30, 2001 AUGUST 31, 2001
----------------- ---------------
ASSETS
Cash and cash equivalents $ 688 $ 931
Accounts receivable, net 48 108
Tax refund receivable - federal and state 346 346
Prepaid taxes and other assets 448 460
Deposits 9 9
Deferred tax asset, net 128 128
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$1,667 $1,982
======= ======
LIABILITIES
Accounts payable and accrued expenses $ 489 $ 633
Accrued liquidation expenses 219 412
Real estate taxes payable 102 314
Accounts payable - related party 808 353
Security deposits 47 49
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Total current liabilities 1,665 1,761
Commitments and contingencies
Net assets in liquidation $ 2 $ 221
======= ======
See accompanying notes.
-4-
ILM II LEASE CORPORATION
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(Liquidation Basis)
For the three months ended November 30, 2001 (Unaudited)
(Dollars in thousands, except per share data)
Net Assets in liquidation, August 31, 2001 $ 221
Increase (decrease) during the three months ended November 30, 2001:
Operating activities:
Rental and other 3,594
Interest income 1
Property operating (3,432)
General and administrative (209)
Professional fees (132)
Director's compensation (32)
---------
Total operating activities (210)
---------
Liquidating activities:
Provision for liquidation expenses (9)
---------
Net decrease in assets in liquidation (219)
---------
Net Assets in liquidation, November 30, 2001 $ 2
=========
See accompanying notes.
-5-
ILM II LEASE CORPORATION
STATEMENT OF OPERATIONS
(GOING CONCERN BASIS)
For the three months ended November 30, 2000 (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
November 30,
2000
------------------
Revenue:
Rental and other income $3,548
Interest income 10
-------
3,558
Expenses:
Facilities lease rent expense 1,139
Dietary salaries, wages and food service expenses 632
Administrative salaries, wages and expenses 271
Marketing salaries, wages and expenses 147
Utilities 187
Repairs and maintenance 134
Real estate taxes 118
Property management fees 208
Other property operating expenses 319
General and administrative expenses 176
Directors compensation 14
Professional fees 144
Depreciation expense 498
-------
3,987
Loss before taxes (429)
Income tax expense:
Current -
Deferred 12
-------
12
Net loss $ (441)
=======
Basic loss per share of common stock $ (0.09)
=======
The above loss per share of common stock is based upon the 5,180,952 shares
outstanding for each period.
See accompanying notes.
-6-
ILM II LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Going Concern Basis)
For the three months ended November 30, 2000 (Unaudited)
(Dollars in thousands, except per share data)
Common Stock
$.01 Par Value Additional
-------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
----------- ----------- ------------ -------------- -----------
Balance at August 31, 2000 5,180,952 $ 52 $448 $ 502 $1,002
Net loss - - - (441) (441)
--------- ---- ---- ----- ------
Balance at November 30, 2000 5,180,952 $ 52 $448 $ 61 $ 561
========= ==== ==== ===== ======
See accompanying notes.
-7-
ILM II LEASE CORPORATION
STATEMENT OF CASH FLOWS
(Going Concern Basis)
For the three months ended November 30, 2000 (Unaudited)
(Dollars in thousands)
Three Months Ended
November 30,
2000
------------------
Cash flows from operating activities:
Net loss $ (441)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation expense 498
Deferred tax expense 12
Changes in assets and liabilities:
Accounts receivable, net (11)
Accounts receivable - related party -
Prepaid expenses and other assets (92)
Accounts payable and accrued expenses (46)
Accounts payable - related party (69)
Real estate taxes payable (199)
Deferred rent payable (6)
Security deposits, net 5
------
Net cash used by operating activities (348)
Cash flows from investing activity:
Purchase of furniture, fixtures and equipment (129)
------
Net cash used by investing activities (129)
Net decrease in cash and cash equivalents (477)
Cash and cash equivalents, beginning of period
1,894
------
Cash and cash equivalents, end of period $1,417
======
See accompanying notes.
-8-
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, 2001. 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.
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. 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. The results of operations
for the three-month period ended November 30, 2001, are not necessarily
indicative of the results to be expected for the year ending August 31, 2002.
When the Company adopted the plan of liquidation on August 31, 2001,
accrued liquidation expenses of $412,000 were recorded. 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. As of the period ended November 30, 2001, another $9,000 was provided
for legal fees incurred as a result of the plan of liquidation and $202,000 of
liquidation expenses were paid during the period.
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.
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 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, 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.
-9-
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
1. GENERAL (CONTINUED)
PLAN OF LIQUIDATION
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. On November 16, 2001, ILM II and ILM II Holding entered into a purchase
and sale agreement (the "BRE Agreement") with BRE/Independent Living, LLC, a
Delaware limited liability company ("BRE"), pursuant to which ILM II and ILM II
Holding agreed to sell, and BRE agreed to purchase, all of ILM II's and ILM II
Holding's right, title and interest in and to its Senior Housing Facilities and
certain other related assets (the "Facilities"). In consideration for the sale
of these Facilities, BRE agreed, subject to certain conditions, to pay ILM II
$45.5 million, approximately $2.275 million of which was paid as a refundable
deposit into escrow (the "BRE Deposit").
On January 15, 2002, ILM II received a letter from BRE, stating its
intention not to consummate the BRE transaction at the agreed upon purchase
price contained in the BRE Agreement. ILM II determined that such refusal to
consummate the BRE Agreement in accordance with its terms constituted a breach
by BRE of the BRE Agreement. Accordingly, ILM II notified BRE that it was
terminating the BRE Agreement. In a separate letter to the Company, BRE
instructed the escrow agent to refund the BRE Deposit to BRE.
Following BRE's breach, on January 23, 2002, ILM II and ILM II Holding
entered into a purchase and sale agreement with Five Star Quality Care, Inc., a
publicly traded Maryland corporation ("FVE"), pursuant to which ILM II and ILM
II Holding (for purposes of discussing the FVE transaction, collectively, the
"Seller") agreed to sell, and FVE agreed to purchase, all of the Seller's right,
title and interest in and to its senior and assisted living facilities and
certain other related assets (the "FVE Agreement"). In consideration for the
sale of these facilities, FVE agreed, subject to certain conditions, to pay the
Seller $45.5 million, approximately $5 million of which has been paid by FVE
into escrow as a deposit (the "FVE Deposit").
Each of the parties' respective obligations under the FVE agreement is
subject to customary closing conditions. FVE's obligation to close the
transaction is subject to a due diligence inspection period ending February 22,
2002, providing FVE with the right to notify the Seller about certain property
conditions or defects requiring more than $250,000 to remediate. Upon such
notification, the Seller may elect to terminate the FVE Agreement and return the
FVE deposit to FVE, or to refund a portion of the escrow deposit or agree to
reduce the purchase price, on a dollar-for-dollar basis, by the amount such
defect exceeds $250,000. If the Seller elects to terminate the FVE Agreement,
FVE may rescind such notice of property defect and continue with the transaction
on the previously agreed terms. Further, after the inspection period has
expired, if either party should breach the FVE Agreement, the non-breaching
party will be entitled to the escrow deposit as liquidated damages, and in the
case of the Seller's breach in limited circumstances, FVE may seek specific
performance or monetary remedies as liquidated damages.
There can be no assurance whether the transactions contemplated by the
FVE Agreement will be consummated or, if consummated, what the exact timing
thereof would be.
-10-
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
1. GENERAL (CONTINUED)
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.
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.
2. 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 sell its interest in the Senior Housing
Facility. The Facilities Lease Agreement with respect to the remaining five
Senior Housing Facilities has been extended on a month-to-month basis beyond its
original expiration date and 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. The lease is accounted for as an operating lease in the Company's
financial statements.
Descriptions of the properties covered by the Facilities Lease
Agreement between the Company and ILM II Holding at November 30, 2001, 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 pays annual
base rent for the use of all of the Senior Housing Facilities in the aggregate
amount of $3,555,427 per year. 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
$11,634,000 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 $274,000 and $256,000
for the three-month periods ended November 30, 2001 and November 30, 2000,
respectively.
-11-
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
2. THE FACILITIES LEASE AGREEMENT (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.
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 three-month periods ended November 30, 2001, and
2000, Capital earned property management fees from the Company of $153,000 and
$208,000.
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 three-month periods ended November 30, 2001 and 2000,
Greenberg Traurig earned fees from the Company of $9,000 and $30,000,
respectively.
ACCOUNTS PAYABLE - RELATED PARTY at November 30, 2001, includes
$717,000 for base and variable rent due to ILM II Holding, $72,000 in accrued
legal fees due to Greenberg Traurig, Counsel to the Company and a related party,
and $19,000 in expense reimbursements due. At August 31, 2001, ACCOUNTS PAYABLE
- - RELATED PARTY primarily includes $353,000 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.
-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.
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 sell its interest in the Senior Housing
Facility. The Facilities Lease Agreement with respect to the remaining five
Senior Housing Facilities has been extended on a month-to-month basis beyond its
original expiration date and 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. The lease is accounted for as an operating lease in the Company's
financial statements.
Pursuant to the Facilities Lease Agreement, the Company pays annual
base rent for use of all the Senior Housing Facilities in the aggregate amount
of $3,555,427. The Company also pays 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 $11,634,000. Variable rent expense was $274,000 and $256,000 for the
three-month periods ended November 30, 2001 and 2000, respectively.
PLAN OF LIQUIDATION
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. On November 16, 2001, ILM II and ILM II Holding entered into a purchase
and sale agreement (the "BRE Agreement") with BRE/Independent Living, LLC, a
Delaware limited liability company ("BRE"), pursuant to which ILM II and ILM II
Holding agreed to sell, and BRE agreed to purchase, all of ILM II's and ILM II
Holding's right, title and interest in and to its Senior Housing Facilities and
certain other related assets (the "Facilities"). In consideration for the sale
of these Facilities, BRE agreed, subject to certain conditions, to pay ILM II
$45.5 million, approximately $2.275 million of which was paid as a refundable
deposit into escrow (the "BRE Deposit").
On January 15, 2002, ILM II received a letter from BRE, stating its
intention not to consummate the BRE transaction at the agreed upon purchase
price contained in the BRE Agreement. ILM II determined that such refusal to
consummate the BRE Agreement in accordance with its terms constituted a breach
by BRE of the BRE Agreement. Accordingly, ILM II notified BRE that it was
terminating the BRE Agreement. In a separate letter to the Company, BRE
instructed the escrow agent to refund the BRE Deposit to BRE.
Following BRE's breach, on January 23, 2002, ILM II and ILM II Holding
entered into a purchase and sale agreement with Five Star Quality Care, Inc., a
publicly traded Maryland corporation ("FVE"), pursuant to which ILM II and ILM
II Holding (for purposes of discussing the FVE transaction, collectively, the
"Seller") agreed to sell, and FVE agreed to purchase, all of the Seller's right,
title and interest in and to its senior and assisted living facilities and
certain other related assets (the "FVE Agreement"). In consideration for the
sale of these facilities, FVE agreed, subject to certain conditions, to pay the
Seller $45.5 million, approximately $5 million of which has been paid by FVE
into escrow as a deposit (the "FVE Deposit").
-13-
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
PLAN OF LIQUIDATION (CONTINUED)
Each of the parties' respective obligations under the FVE agreement is
subject to customary closing conditions. FVE's obligation to close the
transaction is subject to a due diligence inspection period ending February 22,
2002, providing FVE with the right to notify the Seller about certain property
conditions or defects requiring more than $250,000 to remediate. Upon such
notification, the Seller may elect to terminate the FVE Agreement and return the
FVE deposit to FVE, or to refund a portion of the escrow deposit or agree to
reduce the purchase price, on a dollar-for-dollar basis, by the amount such
defect exceeds $250,000. If the Seller elects to terminate the FVE Agreement,
FVE may rescind such notice of property defect and continue with the transaction
on the previously agreed terms. Further, after the inspection period has
expired, if either party should breach the FVE Agreement, the non-breaching
party will be entitled to the escrow deposit as liquidated damages, and in the
case of the Seller's breach in limited circumstances, FVE may seek specific
performance or monetary remedies as liquidated damages.
There can be no assurance whether the transactions contemplated by the
FVE Agreement will be consummated or, if consummated, what the exact timing
thereof would be.
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.
-14-
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 averaged 87% and 89% for the three-month periods ended November 30,
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 November 30, 2001, the Company had cash and cash equivalents of
$688,000 compared to $931,000 at August 31, 2001. This decrease in cash of
$243,000 is, in part, 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 year 2001 or for the first quarter of fiscal year 2002. 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. If they are not
sufficient, the lease payments to ILM II Holding will be reduced to cover the
shortfall.
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.
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ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULT OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 2001, VERSUS THREE MONTHS ENDED NOVEMBER 30,
2000
REVENUES
Total revenues were $3,595,000 for the three months ended November 30,
2001 compared to $3,558,000 for the same period of the prior year, representing
an increase of $37,000 or 1.0%. This increase is the result of increased rental
revenues at certain of the Company's Senior Housing Facilities.
EXPENSES
Total expenses were $3,814,000 for the three months ended November 30,
2001 compared to $3,987,000 for the same period in the prior year, representing
a decrease of $173,000 or 4.3%. This decrease was primarily due to decreases in
property management fees of $55,000 or 26.4%; and depreciation expense of
$498,000 or 100% offset by increases in general and administrative costs of
$33,000 or 18.8%; utilities of $89,000 or 47.6%; administrative salaries and
wages of $52,000 or 19.2%; and marketing of $33,000 or 22.4% as well as minor
increases and decreases in other accounts. 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. A provision for liquidation expense of
$9,000 or a 100% increase was recognized as of November 30, 2001.
INCOME TAX EXPENSE
Income tax expense remains consistent when compared to the same period
in the prior year, as a result of a loss before taxes of $219,000.
NET INCOME
Primarily as a result of the factors noted above, net loss decreased
$222,000 or 50.3% from net loss of $441,000 for the three months ended November
30, 2000 to net loss of $219,000 for the three months ended November 30, 2001.
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, give the Company's property types and the geographic
regions in which the Company is located. The Company does not anticipate any
material effects in financial condition.
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ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q
("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY
FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE FORWARD-LOOKING
STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE
STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," "COULD," "MAY," "SHOULD,"
"ENABLE," "LIKELY," "PROSPECTS," "SEEK," "PREDICTS," "POSSIBLE," "FORECASTS,"
"PROJECTS," "ANTICIPATES," "EXPECTS" AND WORDS OF ANALOGOUS IMPORT AND
CORRELATIVE EXPRESSIONS THEREOF, AS WELL AS STATEMENTS PRECEDED OR OTHERWISE
QUALIFIED BY: "THERE CAN BE NO ASSURANCE" OR "NO ASSURANCE CAN BE GIVEN."
SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES,
STRATEGIES OR GOALS ALSO ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS MAY
ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING, AMONG OTHER THINGS, THE
COMPANY'S CASH FLOWS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION; THE
CONSUMMATION OF ACQUISITION AND FINANCING TRANSACTIONS AND THE EFFECT THEREOF ON
THE COMPANY'S BUSINESS, ANTICIPATED CAPITAL EXPENDITURES, PROPOSED OPERATING
BUDGETS AND ACCOUNTING RESERVES; LITIGATION; PROPERTY EXPANSION AND DEVELOPMENT
PROGRAMS OR PLANS; REGULATORY MATTERS; AND THE COMPANY'S PLANS, GOALS,
STRATEGIES AND OBJECTIVES FOR FUTURE OPERATIONS AND PERFORMANCE. ANY SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
IN SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO A NUMBER OF ASSUMPTIONS REGARDING, AMONG OTHER THINGS, GENERAL ECONOMIC,
COMPETITIVE AND MARKET CONDITIONS. SUCH ASSUMPTIONS NECESSARILY ARE BASED ON
FACTS AND CONDITIONS AS THEY EXIST AT THE TIME SUCH STATEMENTS ARE MADE, THE
PREDICTION OR ASSESSMENT OF WHICH MAY BE DIFFICULT OR IMPOSSIBLE AND, IN ANY
CASE, BEYOND THE COMPANY'S CONTROL. FURTHER, THE COMPANY'S BUSINESS IS SUBJECT
TO A NUMBER OF RISKS THAT MAY AFFECT ANY SUCH FORWARD-LOOKING STATEMENTS AND
ALSO COULD CAUSE ACTUAL RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE
PROJECTED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS PARAGRAPH. MOREOVER, THE COMPANY
DOES NOT INTEND TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT
ANY CHANGES IN GENERAL ECONOMIC, COMPETITIVE OR MARKET CONDITIONS AND
DEVELOPMENTS BEYOND ITS CONTROL.
READERS OF THIS QUARTERLY REPORT ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THAT
ACTUAL FUTURE RESULTS MAY DIFFER.
-17-
ILM II LEASE CORPORATION
PART II. Other Information
ITEM 1. THROUGH 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
-18-
ILM II LEASE CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BY: ILM II LEASE CORPORATION
By: /s/ Jeffry R. Dwyer
---------------------------------------
Jeffry R. Dwyer
President
Dated: February 26, 2002
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