UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
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 : 0-25878
ILM I LEASE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 04-3248637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 225-1174
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 on common stock outstanding as of May 31, 1996: 7,519,430. The
aggregate sales price of the shares sold was $700,000. This does not reflect
market value. There is no current market for these shares.
ILM I LEASE CORPORATION
BALANCE SHEET
May 31, 1996 (Unaudited)
(In thousands)
ASSETS
Cash and cash equivalents $ 2,126
Accounts receivable 148
Prepaid expenses and other assets 168
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$ 2,442
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,101
Accounts payable - affiliates 22
Income taxes payable 82
Shareholders' equity 1,237
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$ 2,442
==========
STATEMENTS OF INCOME
For the three and nine months ended May 31, 1996 (Unaudited)
(In thousands, except per share data)
Three Months Nine Months
------------ -----------
Revenues:
Rental and other income $ 4,331 $ 12,871
Interest income 17 42
-------- --------
4,348 12,913
Expenses:
Property operating expenses 1,976 5,929
Master lease rent expense 1,591 4,614
Real estate taxes 207 607
Property management fees 239 709
General and administrative 35 89
Advisory fees 22 64
-------- --------
4,070 12,012
-------- --------
Income before taxes 278 901
Income tax expense 112 363
-------- --------
Net income $ 166 $ 538
======== ========
Net income per share
(7,519,430 shares outstanding) $0.02 $0.07
===== =====
See accompanying notes.
ILM I LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended May 31, 1996 (Unaudited)
(In thousands)
Common Stock Additional
$.01 Par Value Paid-in Accumulated
Shares Amount Capital Earnings Total
------ ------ ------- -------- ------
Balance at August 31, 1995 15 $ - $ 1 $ (1) $ -
Issuance of common stock 7,504 75 624 - 699
Net income - - - 538 538
----- ---- ----- ------- -------
Balance at May 31, 1996 7,519 $ 75 $ 625 $ 537 $ 1,237
===== ==== ===== ======= =======
STATEMENT OF CASH FLOWS
For the nine months ended May 31, 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Cash flows from operating activities:
Net income $ 538
Adjustments to reconcile net income to
net cash provided by operating activities
Changes in assets and liabilities:
Accounts receivable (148)
Prepaid expenses and other assets (168)
Accounts payable and accrued expenses 1,101
Accounts payable - affiliates 22
Income taxes payable 82
---------
Total adjustments 889
---------
Net cash provided by operating activities 1,427
Cash flows from financing activities:
Proceeds from issuance of common stock 699
---------
Net increase in cash and cash equivalents 2,126
Cash and cash equivalents, beginning of period -
---------
Cash and cash equivalents, end of period $ 2,126
=========
See accompanying notes.
ILM I LEASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization
ILM I 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 PaineWebber Independent Living Mortgage Fund, Inc. (ILM) to operate eight
rental housing projects for independent senior citizens ("the Facilities")
under a master lease arrangement. ILM initially made mortgage loans to
Angeles Housing Concepts, Inc. ("AHC") secured by the Facilities between June
1989 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 Facilities was transferred, effective April 1, 1994, to certain
majority-owned, indirect subsidiaries of ILM, subject to the mortgage loans.
ILM has elected to 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's
annual gross income must be Qualified Rental Income as defined by the Code.
The rent paid by the residents of the 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 Facilities by ILM or its
subsidiaries over an extended period of time could adversely affect ILM's
status as a REIT. Therefore, ILM formed the Company to operate the
Facilities, and by means of a distribution, transferred the ownership of the
common stock of the Company to the holders of ILM common stock on September
1, 1995 (see Note 2). Because the Company, which will be taxed as a regular C
corporation, is not a subsidiary of ILM, it can receive service-related
income without endangering the REIT status of ILM.
The Company's sole business is the operations of the Facilities. The
Company has initially leased the Facilities from ILM Holding, Inc. ("ILM
Holding"), the indirect subsidiary of ILM which currently holds title to the
Facilities, pursuant to a master lease which commenced on September 1, 1995
(see Note 3). Pursuant to the settlement agreement referred to above, the
Company has engaged AHC, the former owner of the Facilities, to manage the
day-to-day operations of the Facilities pursuant to a management agreement
(see Note 6).
Management believes that all necessary adjustments to fairly reflect the
results of the interim period are included in the accompanying financial
statements. All accounting adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.
2. Capital Stock
Prior to September 1, 1995, the Company was a wholly-owned subsidiary of
ILM. Pursuant to a Reorganization and Distribution Agreement, ILM capitalized
the Company with $700,000, 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 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 Common Stock. No certificates or scrip
representing fractional shares of the Company's Common Stock were issued to
holders of ILM common stock as part of the distribution. In lieu of receiving
fractional shares, each holder of ILM 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 $0.15 per share for such fractional
interest.
3. The Master Lease Agreement
ILM Holding (the "Lessor") has leased the Facilities to the Company (the
"Lessee") pursuant to a master lease which commenced on September 1, 1995.
Such master lease is a "triple net" lease with an original fixed term
expiring December 31, 1999. Under the terms of the master lease, the Lessor
has the right to terminate the master lease as to any Facility sold as of the
date of such sale. The master lease is accounted for as an operating lease in
the Company's financial statements.
Descriptions of the properties covered by the master lease between the
Company and ILM Holding are summarized as follows:
Independence Village of East Lansing
The Company operates a 159-unit Senior Housing Facility known as
Independence Village of East Lansing located in East Lansing, Michigan.
Construction of the Senior Housing Facility, which averaged 94% occupancy for
the quarter ended May 31, 1996, was completed in May, 1989.
Independence Village of Winston-Salem
The Company operates a 156-unit Senior Housing Facility known as
Independence Village of Winston-Salem located in Winston-Salem, North
Carolina. Construction of the Senior Housing Facility, which averaged 90%
occupancy for the quarter ended May 31, 1996, was completed in February,
1989.
Independence Village of Raleigh
The Company operates a 163-unit Senior Housing Facility, known as
Independence Village of Raleigh, located in Raleigh, North Carolina.
Construction of the Senior Housing Facility, which averaged 89% occupancy for
the quarter ended May 31, 1996, was completed in March, 1991.
Independence Village of Peoria
The Company operates a 164-unit Senior Housing Facility known as
Independence Village of Peoria located in Peoria, Illinois. Construction of
the Senior Housing Facility, which averaged 89% occupancy for the quarter
ended May 31, 1996, was completed in November, 1990.
Crown Pointe
The Company operates a 133-unit Senior Housing Facility known as Crown
Pointe Apartments located in Omaha, Nebraska. The Senior Housing Facility,
which averaged 98% occupancy for the quarter ended May 31, 1996, was opened
in August of 1985.
Sedgwick Plaza
The Company operates a 150-unit Senior Housing Facility known as Sedgwick
Plaza Apartments located in Wichita, Kansas. The Senior Housing Facility,
which averaged 84% occupancy for the quarter ended May 31, 1996, was opened
in May of 1985.
West Shores
The Company operates a 134-unit Senior Housing Facility known as West
Shores located in Hot Springs, Arkansas. The Senior Housing Facility, which
averaged 95% occupancy for the quarter ended May 31, 1996, was opened in June
of 1987.
Santa Barbara
The Company operates a 123-unit Senior Housing Facility known as Villa
Santa Barbara, located in Santa Barbara, California, under a co-tenancy
arrangement with an affiliated company, ILM II Lease Corporation. The Company
has entered into an agreement with ILM II Lease Corporation regarding such
joint tenancy. ILM II Lease Corporation was formed for similar purposes as
the Company by an affiliated REIT, PaineWebber Independent Living Mortgage
Inc. II, whose indirect subsidiary owns a portion of the Villa Santa Barbara
property. The portion of the Facility leased by the Company represents 25% of
the total project. The Senior Housing Facility, which averaged 69% occupancy
for the quarter ended May 31, 1996, was opened in June of 1979.
During the term of the master lease, the Company is obligated to pay
annual base rent ("Base Rent") for the Facilities. For calendar year 1995,
the annual Base Rent was $5,886,000 (prorated according to the date of
commencement of the master lease), allocated as follows: $896,156 for the
Michigan Facility, $566,914 for the Winston-Salem, North Carolina Facility,
$1,017,659 for the Raleigh, North Carolina Facility, $892,600 for the
Illinois Facility, $893,918 for the Nebraska Facility, $855,702 for the
Kansas Facility, $623,984 for the Arkansas Facility, and $139,067 for the
California Facility. For calendar year 1996 and subsequent years, the annual
Base Rent will be $6,364,800, allocated as follows: $969,054 for the Michigan
Facility, $613,030 for the Winston-Salem, North Carolina Facility, $1,100,441
for the Raleigh, North Carolina Facility, $965,209 for the Illinois Facility,
$966,634 for the Nebraska Facility, $925,310 for the Kansas Facility,
$674,742 for the Arkansas Facility, and $150,380 for the California Facility.
Beginning in fiscal 1997, and for each fiscal year thereafter, the Company
also must pay variable rent ("Variable Rent") to ILM Properties for each
Facility. Such Variable Rent will be equal to 40% of the excess, if any, of
the aggregate total revenues for the Facilities for fiscal 1997 or such
subsequent fiscal year over $16,996,000. In addition, the Company is
obligated to pay as additional rent ("Additional Rent") governmental taxes
and assessments, utility charges, and insurance premiums. Base Rent, Variable
Rent and Additional Rent are collectively referred to in the master lease as
"Rent". The Company believes that the rent it will pay under the master lease
represents the fair rental value for the Facilities. With regard to repairs,
the master lease specifically requires the Company, at its expense, to
inspect, maintain and perform non-structural repairs to the Facilities. ILM
Holding, as the owner of the Facilities and Lessor, is responsible for all
capital improvements and structural repairs to the Facilities.
Under the master lease, the Company's use of the Facilities is limited to
use as a senior housing facility unless the Lessor's consent to some other
use is obtained. 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 Facility in compliance with all local board of
health and other applicable governmental and insurance regulations. The
Facilities located in Arkansas, California 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 Facilities. Violations of such health
and safety standards could result in fines, penalties, closure of a Facility
or other sanctions.
4. Federal Income Taxes
The Company is taxable as a regular C corporation and, therefore, its
income is subject to tax at the federal and state levels. Income taxes at the
appropriate statutory rates have been provided for in the accompanying
financial statements.
ILM recognized a gain of $428,000 on the distribution of the Company's
Common Stock to the shareholders of ILM to the extent that the estimated fair
market value of the Company's Common Stock (of $0.15 per share) exceeded
ILM's basis in such Common Stock. ILM's basis in the Company's Common Stock
equaled the $700,000 contributed to the Company upon the original issuance of
the Company's Common Stock to ILM.
5. The Advisory Agreement and Related Party Transactions
The Company has entered into an Advisory Agreement with PaineWebber Lease
Advisor, L.P. ("the Advisor"), a Virginia limited partnership comprised of
ILM Lease Advisor, Inc. as the general partner and Properties Associates,
L.P. as the limited partner. ILM Lease Advisor, Inc. is a wholly-owned
subsidiary of PaineWebber Properties Incorporated ("PWPI"). The sole general
partner of Properties Associates, L.P. is PAM, Inc., which is a wholly-owned
subsidiary of PWPI. PWPI is a wholly-owned subsidiary of PaineWebber
Incorporated ("PWI"), which is a subsidiary of Paine Webber Group Inc.
("PaineWebber"). Subject to the supervision of the Company's Board of
Directors, the business of the Company is managed by the Advisor. Under the
Advisory Agreement, the Company engages the Advisor and the Advisor agrees to
use its best efforts to manage the day-to-day affairs and operations of the
Company and to provide administrative services and facilities appropriate for
such management. The specific duties of the Advisor under the Advisory
Agreement include recommending selections of providers of professional and
specialized services and handling other managerial functions with respect to
the Facilities. The Advisor is also obligated to provide office and clerical
facilities adequate for the Company's operations and to provide, or obtain
others to provide, accounting, custodial, funds collection and payment,
stockholder communications, legal and other services necessary in connection
with the Company's operations. The Advisory Agreement also obligates the
Advisor to handle or arrange for the handling of the Company's financial and
other records.
Either party may terminate the Advisory Agreement at any time on or after
January 1, 1996 on 90 days' notice, and the Company may terminate the
Advisory Agreement for cause at any time. The Advisor receives a base fee in
an amount equal to 0.5% of the Gross Operating Revenues of the Facilities
operated by the Company as compensation for its services. This fee amounted
to $64,000 for the nine months ended May 31, 1996. In addition, an affiliate
of the Advisor is entitled to reimbursement for expenses incurred in
providing certain financial, accounting and investor communication services
to the Company. Included in general and administrative expenses for the nine
months ended May 31, 1996 is $35,000, representing reimbursements to this
affiliate of the Advisor for providing such services to the Company. In
performing its services under the Advisory Agreement, the Advisor is required
to pay certain employment expenses of its personnel, certain expenses of
employees and agents of the Advisor and of directors, officers and employees
of the Company who are also employees of the Advisor or its affiliates, and
certain of its overhead and miscellaneous administrative expenses relating to
performance of its functions under the Advisory Agreement. The Company is
responsible for reimbursing out-of-pocket expenses of directors, officers and
employees of the Company incurred by them exclusively in such capacity and
for all other costs of its operations.
6. The Management Agreement
The Company has engaged AHC to manage the Facilities pursuant to a
Management Agreement. Under the Management Agreement, AHC generally is
required to perform all operational functions necessary to operate the
Facilities other than certain administrative functions. The functions
performed by AHC include periodic reporting to, and coordinating generally
with, the Company, leasing the individual units in the Facilities,
maintaining bank accounts, maintaining books and records, advertising and
marketing the Facilities, hiring and supervising on-site personnel, and
performing maintenance. The contract is automatically renewable for
successive one-year periods through December 31, 1999, subject to certain
limitations described further below. The terms of the management contract
provide that AHC will receive a base management fee equal to 5.5% of Gross
Operating Revenues of the Senior Housing Facilities, as defined. Such fees
totalled $709,000 for the nine months ended May 31, 1996. The management
agreement may be terminated without cause upon 30 days' written notice
subsequent to September 15, 1996. The contract may be terminated immediately
for cause, which includes failure to meet certain minimum occupancy and
rental rate thresholds. If the agreement is terminated without cause prior
to December 31, 1999, AHC would be due a termination fee of $1,250,000.
Effective September 1, 1995, the obligations to pay AHC under the terms of
the management agreement were transferred to the Company. However, ILM has
guaranteed the payment of the termination fee described above.
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company was formed by PaineWebber Independent Living Mortgage Fund,
Inc. ("ILM"), a publicly-held, non-traded Real Estate Investment Trust ("REIT"),
for the purpose of operating eight Senior Housing Facilities under the terms of
a master lease agreement. ILM had originally made mortgage loans secured by the
Facilities to Angeles Housing Concepts, Inc. ("AHC") between June 1989 and July
1992. In March 1993, AHC defaulted under the terms of such loans which led to
the foreclosure of the Facilities in April 1994 under the terms of a settlement
agreement between ILM and AHC. As of August 31, 1995, the Company, which is
taxable as a regular C corporation and not as a REIT, was a wholly-owned
subsidiary of ILM which had contributed $700,000 in return for all of the
Company's capital stock. On September 1, 1995, after ILM 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's common stock. One share
of common stock of the Company was issued for each full share of ILM's common
stock held. No fractional shares were issued. Holders of ILM's common stock were
not required to pay any cash or other consideration or to exchange their common
stock of ILM for the common stock of the Company. Prior to the distribution of
the Company's stock, ILM's shareholders received an information statement fully
describing the Company and the distribution of its capital stock.
The master lease agreement is initially between ILM's consolidated
affiliate, ILM Holding, Inc., ("ILM Holding") as owner of the properties and
Lessor, and the Company, as Lessee. The master lease is a "triple-net" lease
with an original fixed term expiring December 31, 1999. The Lessor has the right
to terminate the master lease as to any property sold by the Lessor as of the
date of such sale. During the initial term of the master lease, the Company will
be obligated to pay annual base rent for the use of all of the Facilities in the
aggregate amount of $5,886,000 for calendar year 1995 (prorated based on the
commencement date of the lease) and $6,364,800 for calendar year 1996 and each
subsequent year. Beginning in fiscal 1997, and for each fiscal year thereafter,
the Company will also be obligated to pay variable rent to the Lessor for each
Facility. Such variable rent will be equal to 40% of the excess, if any, of the
aggregate total revenues for the Facilities for fiscal 1997 or such subsequent
fiscal year over $16,996,000. In addition, as the Lessee, the Company is
responsible for paying all governmental taxes and assessments, utility charges,
and insurance premiums, as well as the costs of all required maintenance and
non-structural repairs to the Facilities. The Lessor, as the owner of the
Facilities, is responsible for all capital improvements and structural repairs
to the Facilities.
The eight properties which the Company has leased averaged 92% occupancy
for the quarter ended May 31, 1996. The Facilities generated sufficient net cash
flow to cover the master lease rental obligation to ILM Holding during the
initial nine-month period of the Company's operations. Furthermore, annualized
current operating income levels are sufficient to cover the calendar 1996 master
lease payments, which are $120,000 per quarter higher than the rate paid during
calendar 1995. Further improvement in operating income levels is expected upon
the successful lease-up of the Villa Santa Barbara property. A property
renovation and assisted-living conversion program has been in progress at Villa
Santa Barbara for the past 21 months. Phase one of the renovations at the Santa
Barbara Facility, which was completed during fiscal 1995, included renovation of
the lobby, dining room, library, activities room, television and game room and
the laundry rooms. Phase two of the renovation program, which was substantially
completed during the first quarter of fiscal 1996, involved interior unit
improvements, hallway upgrades and the conversion of existing studio units to
assisted living units. Leasing gains at Santa Barbara have been slowed by delays
in completing the capital improvements and in obtaining the required regulatory
licensing to begin leasing the new assisted living units. During the current
quarter, the Company received the required local regulatory approval of its
assisted living operating license. Leasing of the 38 new assisted living units
is now underway. The overall occupancy level at the Santa Barbara Facility had
increased to 79% as of May 31, 1996.
Management of the Facilities has been provided by AHC from, and in certain
cases prior to, the date that the original mortgage loans were made by ILM. In
connection with the settlement agreement referred to above, AHC was retained in
a property management capacity under a contract with an original expiration date
of December 31, 1994. The contract is automatically renewable for successive
one-year periods through December 31, 1999, subject to certain limitations. The
terms of the management contract provide that AHC will receive a base management
fee equal to 5.5% of Gross Operating Revenues of the Senior Housing Facilities,
as defined. The management agreement may be terminated without cause upon 30
days' written notice subsequent to September 15, 1996. The contract may be
terminated immediately for cause, which includes failure to meet certain minimum
occupancy and rental rate thresholds. If the agreement is terminated without
cause prior to December 31, 1999, AHC would be due a termination fee of
$1,250,000. Effective September 1, 1995, the obligations to pay AHC under the
terms of the management agreement were transferred to the Company. However, ILM
has guaranteed the payment of the termination fee described above.
At May 31, 1996, the Company had cash and cash equivalents of $2,126,000.
Such amounts will be used for the Company's working capital requirements. The
Company has no current plans to pay regular dividends to its shareholders. The
Company's dividend policy will be re-evaluated periodically by the Board of
Directors in light of historical operating results and expected future capital
needs. The source of future liquidity is expected to be from operating cash flow
from the Senior Housing Facilities, net of the master lease payments to ILM
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 on both a short-term and long-term basis.
Results of Operations
Three Months Ended May 31, 1996
The Company's operations began on September 1, 1995 with the commencement
of the master lease agreement. As a result, this is the Company's first year of
operations, and, therefore, a comparison to the same period in the prior year is
not applicable. The Company had net income of $166,000 for the three months
ended May 31, 1996. The Company's primary revenue source is rental income from
the individual tenant leases at the Senior Housing Facilities. Rental income
amounted to $4,331,000 for the three months ended May 31, 1996. Rental income
and interest income on cash and cash equivalents exceeded the Company's total
operating expenses of $4,070,000 for the current three-month period. Expenses
included property operating expenses of $1,976,000, master lease rent expense of
$1,591,000, real estate taxes of $207,000 and property management fees of
$239,000. In addition, the Company incurred income tax expense of $112,000 on
pre-tax income of $278,000. Such expense includes federal and state taxes at the
applicable statutory rates.
Nine Months Ended May 31, 1996
The Company's operations began on September 1, 1995 with the commencement
of the master lease agreement. As a result, this is the Company's first year of
operations, and, therefore, a comparison to the same period in the prior year is
not applicable. The Company had net income of $538,000 for the nine months ended
May 31, 1996. The Company's primary revenue source is rental income from the
individual tenant leases at the Senior Housing Facilities. Rental income
amounted to $12,871,000 for the nine months ended May 31, 1996. Rental income
and interest income on cash and cash equivalents exceeded the Company's total
operating expenses of $12,012,000 for the current nine-month period. Expenses
included property operating expenses of $5,929,000, master lease rent expense of
$4,614,000, real estate taxes of $607,000 and property management fees of
$709,000. In addition, the Company incurred income tax expense of $363,000 on
pre-tax income of $901,000. Such expense includes federal and state taxes at the
applicable statutory rates.
ILM I 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 LEASE CORPORATION
By: /s/ Timothy J. Medlock
Timothy J. Medlock
Treasurer
Dated: July 12, 1996