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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
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED FEBRUARY 28, 2002
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 on
Title of each class which registered
- ------------------- -------------------------------
None None
Securities registered pursuant to Section12(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 / /
Shares of common stock outstanding as of February 28, 2002: 5,180,952
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Page 1 of 19
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ILM II LEASE CORPORATION
INDEX
<Table>
<Caption>
PAGE
Part I. Financial Information
Item 1. Financial Statements
Statements of Net Assets in Liquidation
February 28, 2002 (Unaudited) and August 31, 2001............................................4
Statements of Changes in Net Assets in Liquidation for the six and three months ended
February 28, 2002 (Unaudited) and August 31, 2001............................................5
Statements of Operations
For the six and three months ended February 28, 2001 (Unaudited).............................6
Statement of Changes in Shareholders' Equity
For the six months ended February 28, 2001 (Unaudited).......................................7
Statement of Cash Flows
For the six months ended February 28, 2001 (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
</Table>
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ILM II LEASE CORPORATION
Part I. Financial Information
Item I. Financial Statements
(See next page)
-3-
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ILM II LEASE CORPORATION
STATEMENTS OF NET ASSETS IN LIQUIDATION
(Liquidation Basis)
February 28, 2002 (Unaudited) and August 31, 2001
(Dollars in thousands, except per share data)
<Table>
<Caption>
ASSETS
February 28, 2002 August 31, 2001
----------------- ---------------
Cash and cash equivalents $ 1,107 $ 931
Accounts receivable, net 4 108
Tax refund receivable - federal and state 423 346
Prepaid taxes and other assets 355 460
Deposits 9 9
Deferred tax asset, net 0 128
-------- -------
$ 1,898 $ 1,982
======== =======
LIABILITIES
Accounts payable and accrued expenses $ 543 $ 633
Accrued liquidation expenses 246 412
Real estate taxes payable 164 314
Accounts payable - related party 901 353
Security deposits 44 49
-------- -------
Total current liabilities 1,898 1,761
Commitments and contingencies
Net assets in liquidation $ 0 $ 221
======== =======
</Table>
See accompanying notes.
-4-
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ILM II LEASE CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(Liquidation Basis)
For the six and three months ended February 28, 2002 (Unaudited)
(Dollars in thousands, except per share data)
<Table>
<Caption>
Six Months Three Months
Ended Ended
February 28, February 28,
2002 2002
---------------- ---------------
Net assets in liquidation, beginning of period $ 221 $ 2
Increase (decrease) during the period:
Operating activities:
Rental and other 7,268 3,674
Interest income 2 1
Property operating (6,717) (3,286)
General and administrative (404) (194)
Professional fees (198) (66)
Director's compensation (67) (35)
-------- -------
Total operating activities (116) 94
Liquidating activities:
Provision for liquidation expenses (54) (45)
Tax expense (51) (51)
-------- -------
Net decrease in assets in liquidation (221) (2)
-------- -------
Net assets in liquidation, end of period $ 0 $ 0
======== =======
</Table>
-5-
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ILM II LEASE CORPORATION
STATEMENTS OF OPERATIONS
(GOING CONCERN BASIS)
For the six and three months ended February 28, 2001 (Unaudited)
(Dollars in thousands, except per share data)
<Table>
<Caption>
Six Months Three Months
Ended Ended
February 28, February 28,
2002 2002
---------------- ---------------
REVENUES
Rental and other income $ 7,121 $ 3,573
Interest income 19 9
-------- -------
7,140 3,582
EXPENSES
Master lease rent expense 2,293 1,155
Dietary and food service salaries, wages and expenses 1,252 620
Administrative salaries, wages and expenses 573 301
Marketing salaries, wages and expenses 314 167
Utilities 436 125
Real estate taxes 235 117
Property management fees 409 201
Other property operating expenses 630 312
General and administrative 265 129
Directors compensation 25 11
Professional fees 206 61
Depreciation expense 560 63
-------- -------
7,457 3,512
-------- -------
(Loss) income before taxes (317) 70
Income tax expense (benefit):
Current 42 28
Deferred 12 -
-------- -------
54 28
-------- -------
NET (LOSS) INCOME $ (371) $ 42
======== =======
Basic (loss) earnings per share of common stock $ (0.07) $ 0.01
======== =======
</Table>
The above earnings per share of common stock is based upon the 5,180,952 shares
outstanding for each period.
See accompanying notes.
-6-
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ILM II LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Going Concern Basis)
For the six months ended February 28, 2001 (Unaudited)
(Dollars in thousands, except per share data)
<Table>
<Caption>
Common Stock
$.01 Par Value Additional
------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------------- ----------- --------------- ----------------- ---------
Balance at August 31, 1999 5,180,952 $52 $448 $766 $1,266
Net income - - - 154 154
--------- --- ---- ----- ------
Balance at February 29, 2000 5,180,952 $52 $448 $920 $1,420
========= === ==== ===== ======
Balance at August 31, 2000 5,180,952 $52 $448 $502 $1,002
Net Loss - - - (371) (371)
--------- --- ---- ----- ------
Balance at February 28, 2001 5,180,952 $52 $448 $131 $ 631
========= === ==== ===== ======
</Table>
See accompanying notes.
-7-
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ILM II LEASE CORPORATION
STATEMENT OF CASH FLOWS
(Going Concern Basis)
For the six months ended February 28, 2001 (Unaudited)
(Dollars in thousands)
<Table>
<Caption>
Six Months
Ended
February 28,
2001
-----------------
Cash flows from operating activities:
Net (loss) income $ (371)
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:
Depreciation expense 560
Deferred tax expense 12
Changes in assets and liabilities:
Accounts receivable, net (49)
Accounts receivable - related party (29)
Prepaid expenses and other assets (80)
Accounts payable and accrued expenses (16)
Accounts payable - related party (68)
Real estate taxes payable (124)
Federal income taxes payable -
Deferred rent payable (6)
Security deposits, net 7
-------
Net cash (used by) provided by operating activities (164)
Cash flows from investing activity:
Additions to furniture, fixtures and equipment (109)
-------
Net cash used in investing activities (109)
-------
Net (decrease) increase in cash and cash equivalents (273)
Cash and cash equivalents, beginning of period 1,894
-------
Cash and cash equivalents, end of period $ 1,621
=======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for state income taxes $ 42
=======
</Table>
See accompanying notes
-8-
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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 six- and
three-month periods ended February 28, 2002 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
included 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. During the six-month period ended February 28, 2002,
an additional $45,000 was provided for legal fees and administration costs
incurred as a result of the plan of liquidation.
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-
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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 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
agreed to sell, and FVE agreed to purchase, the Senior Housing Facilities.
On April 2, 2002, the sale of the facilities to FVE was consummated and the
Facilities Lease Agreement was terminated.
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, because of the April 2, 2002 sale of the Senior
Housing Facilities and the April 2, 2002 termination of the Facilities
Lease Agreement, the Company is carrying out a plan of liquidation. 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.
-10-
<Page>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
2. THE FACILITIES LEASE AGREEMENT
ILM II Holding (the "Lessor"), a direct subsidiary of ILM II, leased
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 was extended on a month-to-month
basis beyond its original expiration date and was terminated on April 2,
2002, as a result of the sale of the Senior Housing Facilities. The lease
was accounted for as an operating lease in the Company's financial
statements.
Descriptions of the properties that were covered by the Facilities
Lease Agreement between the Company and ILM II Holding at February 28,
2002, are summarized as follows:
<Table>
<Caption>
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
</Table>
(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.
On April 2, 2002, the Facilities Agreement was terminated. 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 per year. The facilities lease was a "triple-net" lease whereby
the Lessee paid 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, was 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. Effective September 1,
2000, variable rent was payable quarterly in an amount equal to 40% of the
excess of the aggregate total revenues over $11,634,000. Variable rent
expense was $580,000 and $306,000 for the six- and three-month periods
ended February 28, 2002, compared to $523,000 and $266,000 for the six- and
three-month periods ended February 28, 2001.
The Company's use of the properties was limited to use as Senior Housing
Facilities. The Company had 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 were 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 was extended on a month-to-month basis and was
terminated on April 2, 2002, as a result of the sale of the Senior Housing
Facilities and the termination of the Facilities Lease Agreement.
-11-
<Page>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
2. THE FACILITIES LEASE AGREEMENT (CONTINUED)
Under the Management Agreement, Capital was 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 earned
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
was 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 six- and three-month periods ended February 28, 2002,
Capital earned property management fees from the Company of $324,000 and
$172,000. For the six- and three-month periods ended February 28, 2001,
Capital earned property management fees from the Company of $409,000 and
$201,000, respectively.
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 six- and three-month periods ended February 28, 2002,
Greenberg Traurig earned fees from the Company of $15,000 and $6,000,
respectively. For the six- and three-month periods ended February 28, 2001,
Greenberg Traurig earned fees from the Company of $42,000 and $11,000,
respectively.
ACCOUNTS PAYABLE - RELATED PARTY at February 28, 2002, includes
$1,023,000 for base and variable rent due to ILM II Holding, $2,000 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-
<Page>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Facilities Lease Agreement was a "triple-net" lease whereby the Lessee
paid 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, was responsible for
all major capital improvements and structural repairs to the Senior Housing
Facilities.
ILM II Holding (the "Lessor"), a direct subsidiary of ILM II, leased 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. The Facilities Lease Agreement with respect to the five
Senior Housing Facilities had been extended on a month-to-month basis beyond its
original expiration date and continued on a month-to-month basis until it was
terminated on April 2, 2002 as a result of the sale of the Senior Housing
Facilities. The lease was accounted for as an operating lease in the Company's
financial statements.
Pursuant to the Facilities Lease Agreement, the Company paid annual base
rent for use of all the Senior Housing Facilities in the aggregate amount of
$3,555,427. The Company also paid variable rent, on a quarterly basis, for each
Senior Housing Facility in an amount equal to 40% of the excess, if any, of the
aggregate total revenues for the Senior Housing Facilities, on an annualized
basis, over $11,634,000. Variable rent expense was $580,000 and $306,000 for the
six- and three-month periods ended February 28, 2002, compared to $523,000 and
$266,000 for the six- and three-month period ended February 28, 2001.
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 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 agreed to sell,
and FVE agreed to purchase, the Senior Housing Facilities. On April 2, 2002, the
sale of the facilities to FVE was consummated and the Facilities Lease Agreement
was terminated.
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, because of the April 2, 2002 sale of the Senior Housing
Facilities and the April 2, 2002 termination of the Facilities Lease Agreement,
the Company is carrying out a plan of liquidation. 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.
-13-
<Page>
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 had invested
averaged 87% and 88% for the three-month periods ended February 28, 2002 and
2001, respectively. Annualized base rent payments of $3,555,427 remained in
effect throughout the term of the lease. As noted above, the Facilities Lease
Agreement also provided for the payment of variable rent. The Senior Housing
Facilities generated gross revenues which were in excess of the specified
threshold in the variable rent calculation.
At February 28, 2002, the Company had cash and cash equivalents of
$1,107,000 compared to $931,000 at August 31, 2001. As noted above, under the
terms of the Facilities Lease Agreement, the Lessor was 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. The Company did not pay cash dividends in
fiscal year 2001 or for the first two quarters of fiscal year 2002. The Company
will not pay cash dividends in the future.
Because of the April 2, 2002 sale of the Senior Housing Facilities and the
resulting termination of the Facilities Lease Agreement, the Company is carrying
out a plan of liquidation. 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-
<Page>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 2002, VERSUS SIX MONTHS ENDED FEBRUARY 28, 2001
REVENUES
Total revenues were $7,270,000 for the six months ended February 28, 2002
compared to $7,140,000 for the same period of the prior year, representing an
increase of $130,000 or 1.8%. This increase is the result of increased rental
revenues at certain of the Company's Senior Housing Facilities.
EXPENSES
Total expenses were $7,440,000 for the six months ended February 28, 2002
compared to $7,457,000 for the same period in the prior year, representing a
decrease of $17,000 or 0.2%. This decrease was primarily due to a $445,000 or
79.5% decrease in depreciation expense 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 will revert to ILM II Holding upon lease expiration or termination. This
decrease in expenses was accompanied by an $85,000 or 20.8% decrease in property
management fees as well as other minor decreases in other accounts. These
decreases were accompanied by increases in general and administrative costs of
$139,000 or 52.5%; utilities of $80,000 or 18.3%; administrative salaries wages
and expenses of $72,000 or 12.6%; marketing salaries, wages and expenses of
$34,000 or 10.8%; repairs and maintenance of $52,000 or 20.2%; real estate taxes
of $41,000 or 17.6%; Director's compensation of $42,000 or 168.0%; and a $54,000
or 100.0% increase in the provision for liquidation expenses as a result of
transitioning to the liquidation basis of accounting and recognizing the
increased value of investment properties at fair value as compared to the same
period last year, when the liquidation basis of accounting had not yet been
adopted.
INCOME TAX EXPENSE
Income tax expense increased $105,000 or 194.4% from income tax benefit of
$54,000 for the six months ended February 28, 2001, to income tax expense of
$51,000 as of February 28, 2002. This increase in income tax expense is the
result of a loss before taxes of $170,000 for the six months ended February 28,
2002, compared to a loss before taxes of $331,000 in the same period of the
prior year.
NET LOSS
Primarily as a result of the factors noted above, net loss decreased
$150,000 or 40.5% from net loss of $371,000 for the six months ended February
28, 2001, to net loss of $221,000 for the six months ended February 28, 2002.
THREE MONTHS ENDED FEBRUARY 28, 2002, VERSUS THREE MONTHS ENDED FEBRUARY 28,
2001
REVENUES
Total revenues were $3,675,000 for the three months ended February 28, 2002
compared to $3,582,000 for the same period of the prior year, representing an
increase of $93,000 or 2.6%. This increase is the result of increased rental
revenues at certain of the Company's Senior Housing Facilities.
EXPENSES
Total expenses were $3,626,000 for the three months ended February 28, 2002
compared to $3,512,000 for the same period in the prior year, representing an
increase of $114,000 or 3.3%. This increase was primarily due to increases in
general and administrative costs of $65,000 or 50.4%; repairs and maintenance of
$27,000 or 21.6%; Director's compensation of $24,000 or 218.2%; and real estate
taxes of $22,000 or 18.8%. These increases were offset by decreases in master
lease rent expense of $103,000 or 8.9% as a result of decreases in variable rent
expense and property management fees of $29,000 or 14.4%; utilities of $9,000 or
3.8% as well as minor increases in other accounts. A provision for liquidation
expense of $45,000 or a 100% increase was recognized as of February 28, 2002, as
the company had not yet adopted the liquidation basis of accounting in the same
period of the prior year.
-15-
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ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULT OF OPERATIONS (CONTINUED)
INCOME TAX EXPENSE
Income tax expense increased $23,000 or 82.1% from income tax expense of
$28,000 for the three months ended February 28, 2001, to income tax expense of
$51,000 as of February 28, 2002. This increase in income tax expense is the
result of income before taxes of $49,000 for the three months ended February 28,
2002, compared to income before taxes of $70,000 in the same period of the prior
year.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$44,000 or 105.2% from net income of $42,000 for the three months ended February
28, 2001 to net loss of $2,000 for the three months ended February 28, 2002.
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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.
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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.
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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: May 13, 2002
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