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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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 of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28 State Street, Suite 1100, Boston, MA 02109
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (888) 257-3550
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 No X
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Shares of common stock outstanding as of March 31, 1998: 7,519,430.
Page 1 of 15
ILM I LEASE CORPORATION
BALANCE SHEETS
November 30, 1997 (Unaudited) and August 31, 1997
(In thousands)
ASSETS
November 30 August 31
----------- ---------
Cash and cash equivalents $3,036 $1,473
Accounts receivable - related party 569 93
Accounts receivable 27 -
Prepaid taxes 342 391
Prepaid expenses and other assets 86 108
------ ------
Total current assets 4,060 2,065
Furniture, fixtures and equipment 664 591
Less: accumulated depreciation (119) (93)
------ ------
545 498
Deferred tax asset, net 59 70
------ ------
$4,664 $2,633
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 818 $ 592
Termination fee payable 600 600
Real estate taxes payable 184 170
Accounts payable - related party 1,922 116
Accrued expenses 191 290
Security deposits 6 5
------ ------
Total current liabilities 3,721 1,773
Deferred rent payable 77 86
------ ------
Total liabilities 3,798 1,859
Commitments and Contingencies
Shareholders' Equity
Common stock, $0.01 par value,
20,000,000 shares authorized,
7,519,430 shares issued and outstanding 75 75
Additional paid-in capital 625 625
Retained earnings 166 74
------ ------
Total Shareholders' equity 866 774
------ ------
$4,664 $2,633
====== ======
See accompanying notes.
-2-
ILM I LEASE CORPORATION
STATEMENTS OF INCOME
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
November 30,
---------------------
1997 1996
------ ------
Revenues
Rental and other income $4,750 $4,400
Interest income 8 22
------ ------
4,758 4,422
Expenses
Master lease rent expense 1,782 1,582
Dietary and food service salaries, wages and expenses 905 829
Administrative salaries, wages and expenses 319 286
Marketing salaries, wages and expenses 216 207
Utilities 197 203
Repairs and maintenance 155 152
Real estate taxes 201 214
Property management fees 242 207
Other property operating expenses 367 370
General and administrative 195 31
Advisory fees -- 22
Depreciation expense 26 9
------ ------
4,605 4,112
------ ------
Income before taxes 153 310
Income tax expense (benefit):
Current 50 115
Deferred 11 9
------ ------
61 124
------ ------
Net income $ 92 $ 186
====== ======
Basic earnings per share of common stock $ 0.01 $ 0.02
====== ======
The above earnings per share of common stock is based upon the 7,519,430 shares
outstanding for each period.
See accompanying notes.
-3-
ILM I LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands)
Common Stock
$.01 Par Value Additional
--------------------- Paid-In Accumulated
Shares Amount Capital Earnings Total
------ ----- ----- ------ ------
Balance at August 31, 1996 7,519 $75 $625 $361 $1,061
Net income -- -- -- 186 186
----- --- ---- ---- ------
Balance at November 30, 1996 7,519 $75 $625 $547 $1,247
===== === ==== ==== ======
Balance at August 31, 1997 7,519 $75 $625 $ 74 $ 774
Net income -- -- -- 92 92
----- --- ---- ---- ------
Balance at November 30, 1997 7,519 $75 $625 $166 $ 866
===== === ==== ==== ======
See accompanying notes.
-4-
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 92 $ 186
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 26 9
Changes in assets and liabilities:
Accounts receivable - affiliates (477) --
Accounts receivable (27) (30)
Prepaid expenses and other assets 71 147
Deferred tax asset, net 11 9
Accounts payable and accrued expenses 127 (333)
Accounts payable - affiliates 1,806 6
Real estate taxes payable 15 (36)
Deferred rent payable (9) (9)
Security deposits 1 --
------ ------
Net cash provided by (used in) operating activities 1,636 (51)
------ ------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (73) (8)
------ ------
Net cash used in investing activities (73) (8)
------ ------
Net increase (decrease) in cash and cash equivalents 1,563 (59)
Cash and cash equivalents, beginning of period 1,473 2,185
------ ------
Cash and cash equivalents, end of period $3,036 $2,126
====== ======
Supplemental disclosure:
Cash paid during the period for income taxes $ -- $ --
====== ======
See accompanying notes.
-5-
ILM I 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 the
Company's Annual Report for the year ended August 31, 1997. 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 period. All of the accounting adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of November 30, 1997 and August 31, 1997 and revenues and
expenses for each of the three-month periods ended November 30, 1997 and 1996.
Actual results could differ from the estimates and assumptions used. Certain
items in the prior period's financial statements have been reclassified to
conform to the current period's presentation.
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 ILM
Senior Living, Inc., formerly PaineWebber Independent Mortgage Fund, Inc. ("ILM
I"), to operate eight rental housing projects that provide independent-living
and assisted-living services for independent senior citizens ("the Senior
Housing Facilities") under a master lease arrangement. ILM I initially made
mortgage loans to Angeles Housing Concepts, Inc. ("AHC") secured by the Senior
Housing 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 Senior Housing Facilities was transferred, effective
April 1, 1994, to certain majority-owned, indirect subsidiaries of ILM I,
subject to the mortgage loans. Subsequently, the indirect subsidiaries of ILM I
were merged into ILM Holding, Inc. ("ILM 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
(the "Agreement") which was assigned to the Company as of September 1, 1995. The
Agreement with AHC was terminated in July 1996. ILM I 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 I's annual gross income must be
qualified rental income as defined by the Code. The rent paid by the residents
of the Senior Housing Facilities likely would not be deemed to be qualified
rental income because of the extent of services provided to residents.
Consequently, the operation of the Senior Housing Facilities by ILM I or its
subsidiaries over an extended period of time could adversely affect ILM I's
status as a REIT. Therefore, ILM I formed the Company to operate the Senior
Housing Facilities, and by means of a distribution, transferred the ownership of
the common stock of the Company to the holders of ILM I common stock on
September 1, 1995. Because the Company, which is taxed as a regular C
corporation, is no longer a subsidiary of ILM I, it can receive service-related
income without endangering the REIT status of ILM I.
The Company's sole business is the operation of the Senior Housing
Facilities. The Company initially leased the Senior Housing Facilities from ILM
Holding, a majority-owned and consolidated affiliate of ILM I which currently
holds title to the Senior Housing Facilities, pursuant to a master lease which
commenced on September 1, 1995 and expires on December 31, 1999 (see Note 2).
The Company entered into a property management agreement with Capital Senior
Management 2, Inc. of Dallas, Texas ("Capital") to handle the day-to-day
operation of the Senior Housing Facilities. The management agreement with
Capital was executed in July 1996. In November 1996, Lawrence A. Cohen, a
director of the Company and President, Chief Executive Officer and Director of
ILM I, became Vice Chairman and Chief Financial Officer of Capital Senior Living
Corporation, an affiliate of Capital. As a result, the management agreement with
Capital is considered a related party transaction (see Note 3).
-6-
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
2. The Master Lease Agreement
--------------------------
ILM Holding (the "Lessor") has leased the Senior Housing Facilities to the
Company (the "Lessee") pursuant to a master lease which commenced on September
1, 1995. Under the terms of the master lease, which has a scheduled expiration
date of December 31, 1999, the Lessor has the right to terminate the master
lease as to any Senior Housing 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:
Rentable
Name Location Units
- ---- -------- -----
Independence Village of East Lansing East Lansing, MI 161
Independence Village of Winston-Salem Winston-Salem, NC 159
Independence Village of Raleigh Raleigh, NC 164
Independence Village of Peoria Peoria, IL 165
Crown Point Apartments Omaha, NE 135
Sedgwick Plaza Apartments Wichita, KS 150
West Shores Hot Springs, AR 136
Villa Santa Barbara (1) Santa Barbara, CA 125
(1) The Company operates Villa Santa Barbara under a co-tenancy arrangement
with an affiliated company, ILM II Lease Corporation ("Lease II"). The
Company has entered into an agreement with Lease II regarding such
joint tenancy. Lease II was formed for similar purposes as the Company
by an affiliated REIT, ILM II Senior Living, Inc. ("ILM II"), a
subsidiary of which owns a portion of the Villa Santa Barbara property.
The portion of the Senior Housing Facility leased by the Company
represents 25% of the total project. Villa Santa Barbara is 25% owned
by ILM Holding and 75% by ILM II Holding.
During the term of the master lease, the Company is obligated to pay annual
base rent ("Base Rent") for the Senior Housing Facilities. The master 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 ("Additional
Rent"). The Lessor is responsible for major capital improvements and structural
repairs to the Senior Housing Facilities. In addition, beginning in the second
quarter of fiscal 1997 and for the remainder of the lease term, the Company is
also obligated to pay variable rent ("Variable Rent") for each facility. Such
Variable Rent is payable quarterly and equals 40% of the excess, if any, of the
aggregate total revenues for the facilities, on an annualized basis, over
$16,996,000. Variable rent amounted to $200,000 for the three months ended
November 30, 1997.
Under the master lease, the Company's use of the properties is limited to
use as Senior Housing Facilities 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 Senior Housing Facility in compliance with all local board of
health and other applicable governmental and insurance regulations. The Senior
Housing 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 the Senior Housing Facilities. Violations of such
health and safety standards could result in fines, penalties, closure of a
Senior Housing Facility or other sanctions.
-7-
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
3. Related Party Transactions
--------------------------
Subject to the supervision of the Company's Board of Directors, assistance
in managing the business of the Company was provided by PaineWebber. As
previously discussed in Note 1, PaineWebber resigned effective as of June 18,
1997.
The Company has retained Capital Senior Management 2, Inc. ("Capital") of
Dallas, Texas to be the property manager of the Senior Housing Facilities
pursuant to a management agreement which commenced on July 29, 1996. In November
1996, Lawrence A. Cohen, a Director of the Company and President, Chief
Executive Officer and Director of ILM I, was also named Vice Chairman and Chief
Financial Officer of Capital Senior Living Corporation, an affiliate of Capital.
The initial term of the management agreement expires on December 31, 1999, which
coincides with the expiration of the master lease agreement between the Company
and ILM Holding described in Note 2. Under the terms of the management
agreement, in the event that the master lease agreement is extended beyond
December 31, 1999, the management agreement will be extended as well, but not
beyond July 29, 2001. 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 is also eligible to earn an incentive
management fee equal to 25% of the amount by which the average monthly net cash
flow of the Senior Housing Facilities, as defined, for the twelve-month period
ending on the last day of each calendar month exceeds a specified base amount.
Each August 31, beginning on August 31, 1997, the Base Amount will be increased
based on the percentage increase in the Consumer Price Index. ILM I has
guaranteed the payment of all fees due to Capital under the terms of the
management agreement.
On September 18, 1997, the Company entered into an agreement with Capital
Senior Development, Inc., an affiliate of Capital, to manage the development
process for the potential expansions of several of the Senior Housing
Facilities. Capital Senior Development, Inc. will receive a fee equal to 7% of
the total development costs of these expansions if they are pursued. ILM Holding
will reimburse the Company for all costs related to these potential expansions
including fees to Capital Senior Development, Inc. During the quarter ended
November 30, 1997, Capital Senior Development, Inc. earned fees of $96,810 for
managing pre-construction development activities for potential expansions of the
Senior Housing Facilities.
Jeffry R. Dwyer, Secretary and director of the Company, is an employee of
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, which acts as Counsel to the
Company and its affiliates. Greenberg Traurig Hoffman Lipoff Rosen & Quentel
earned fees from the Company of $33,566 for the quarter ended November 30, 1997.
Accounts receivable - related party at November 30, 1997 and August 31,
1997 includes advances of $569,000 and $93,000, respectively, to ILM Holding,
primarily for the purchase of land for the expansion of the Senior Housing
Facilities. Accounts payable - related party at November 30, 1997 and August 31,
1997 consists principally of base rent and variable rent payable to ILM Holding
of $1,907,000 and $116,000, respectively, and expense reimbursement payable to
Lease II of $15,000 and $0, respectively.
4. Legal Proceedings and Contingencies
-----------------------------------
A management agreement between ILM Holding and Angeles Housing Concepts,
Inc. ("AHC"), which covered the management of all eight Senior Housing
Facilities, was assigned to the Company effective September 1, 1995. On July 29,
1996, the Company and ILM Holding ("the Companies") terminated the property
management agreement with AHC. The management agreement was terminated for cause
pursuant to the terms of the contract. Simultaneously with the termination of
the management agreement, the Companies, together with certain affiliated
entities, filed suit against AHC in the United States District Court for the
Eastern District of Virginia for breach of contract, breach of fiduciary duty
and fraud. The Company and ILM Holding allege, among other things, that AHC
willfully performed actions specifically
-8-
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
4. Legal Proceedings and Contingencies (continued)
-----------------------------------------------
in violation of the management agreement and that such actions caused damages to
the Companies. Due to the termination of the agreement for cause, no termination
fee was paid to AHC. Subsequent to the termination of the management agreement,
AHC filed for protection under Chapter 11 of the U.S. Bankruptcy Code in its
domestic State of California. The filing was challenged by the Companies, and
the Bankruptcy Court dismissed AHC's case effective October 15, 1996. In
November 1996, AHC filed with the Virginia District Court an answer in response
to the litigation initiated by the Companies and a counterclaim against ILM
Holding. The counterclaim alleges that the management agreement was wrongfully
terminated for cause and requests damages which include the payment of a
termination fee in the amount of $1,250,000, payment of management fees pursuant
to the contract from August 1, 1996 through October 15, 1996, which is the
earliest date the management agreement could have been terminated without cause,
and recovery of attorney's fees and expenses. The aggregate amount of damages
against all parties as requested in AHC's counterclaim exceeds $2,000,000. ILM I
has guaranteed the payment of the termination fee at issue in these proceedings
to the extent that any termination fee is deemed payable by the court and in the
event that the Company fails to perform pursuant to its contractual obligations.
The court initially set a trial date of April 28, 1997 but, at AHC's request,
rescheduled the trial for June 23, 1997. On June 13, 1997 and July 8, 1997, the
court issued orders to enter judgment against ILM I and ILM II in the amount of
$1,000,000 ("the Orders"). In so doing, the court effectively canceled the June
23, 1997 trial date. The Orders do not contain any findings of fact or
conclusions of law. On July 10, 1997, the Company, ILM I, ILM II, and Lease II
filed a notice of appeal to the United States Court of Appeals for the Fourth
Circuit from the Orders. The Company intends to diligently pursue the appeal.
The eventual outcome of this litigation cannot presently be determined. However,
provision of $600,000 for the liability which might result to the Company was
recorded as "termination fee payable" at August 31, 1997. The remaining $400,000
was recorded on the financial statements of Lease II.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, Lawrence Cohen, and others alleging that
the defendants intentionally interfered with AHC's property management agreement
with ILM Holding by inducing ILM Holding to terminate the management agreement
(the "California litigation"). The complaint seeks damages of at least
$2,000,000. On March 4, 1997, the defendants removed the case to Federal
District Court in the Central District of California. Trial in the action is
expected during 1998 and discovery has just begun. At a meeting on February 26,
1997, the Company's Board of Directors concluded that since all of Mr. Cohen's
actions relating to the California litigation were taken either on behalf of the
Company under the direction of the Board or as a PaineWebber Properties
employee, the Company or its affiliates should indemnify Mr. Cohen with respect
to any expenses arising from the California litigation, subject to any insurance
recoveries for those expenses. The Company's Board also concluded that, subject
to certain conditions, the Company or its affiliates should advance up to
$20,000 to pay reasonable legal fees and expenses incurred by Capital in the
California litigation. Subsequently, the Boards of the Company and ILM II Lease
Corporation voted to increase the maximum amount of the advance to $100,000. By
the end of November 1997, Capital had incurred $100,000 of legal expenses in the
California Litigation. On February 2, 1998, the amount to be advanced to Capital
was increased to include 75% of the California litigation legal fees and costs
incurred by Capital for December 1997 and January 1998, plus 75% of such legal
fees and costs incurred by Capital thereafter, not to exceed $500,000. The
defendants intend to vigorously defend the claims made against them in the
California litigation. The eventual outcome of this litigation cannot presently
be determined and, accordingly, no provision for any liability has been recorded
in the accompanying financial statements.
5. Subsequent Events
-----------------
On March 24, 1998, a fire occurred at the Senior Housing Facility located
in East Lansing Michigan. The damage to the building will be repaired with
proceeds from the facility's insurance. The cost of the building repairs has
been estimated at approximately $400,000.
-9-
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company was formed in 1995 by ILM I, a publicly-held, non-traded REIT,
for the purpose of operating eight Senior Housing Facilities under the terms of
a master lease agreement. ILM I contributed $700,000 in return for all of the
issued and outstanding shares of the Company's common stock. ILM I had
originally made mortgage loans secured by the Senior Housing Facilities to AHC
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 Senior Housing Facilities was transferred, effective April 1, 1994, to
certain majority-owned, indirect subsidiaries of ILM I, subject to the mortgage
loans. Subsequently, these indirect subsidiaries were merged into ILM Holding,
which is also a majority-owned subsidiary of ILM I. As part of the fiscal 1994
settlement agreement with AHC, AHC was retained as the property manager for the
Senior Housing Facilities pursuant to the terms of an Agreement which was
assigned to the Company as of September 1, 1995. As discussed further below, the
Agreement with AHC was terminated in July 1996.
ILM I has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended ("the Code"), for each taxable year of operations. In order to
maintain its status as a REIT, 75% of ILM I's annual gross income must be
qualified rental income as defined by the Code. The rent paid by the residents
of the Senior Housing Facilities likely would not be deemed to be qualified
rental income because of the extent of services provided to residents.
Consequently, the operation of the Senior Housing Facilities by ILM I or its
subsidiaries over an extended period of time could adversely affect ILM I's
status as a REIT. Therefore, ILM I formed the Company to operate the Senior
Housing Facilities, and by means of a distribution, transferred the ownership of
the common stock of the Company to the holders of ILM I common stock. Because
the Company, which is taxed as a regular C corporation, is no longer a
subsidiary of ILM I, it can receive service-related income without endangering
the REIT status of ILM I. On September 1, 1995, after ILM I 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 I's common stock.
One share of common stock of the Company was issued for each full share of ILM
I's common stock held. No fractional shares were issued. Holders of ILM I's
common stock were not required to pay any cash or other consideration or to
exchange their common stock of ILM I for the common stock of the Company. Prior
to the distribution of the Company's stock, ILM I's shareholders received an
information statement fully describing the Company and the distribution of its
capital stock.
The master lease agreement, which commenced on September 1, 1995, is between
ILM Holding, as owner of the properties and lessor, and the Company, as lessee.
The master 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 Holding, as the lessor, is responsible for all major
capital improvements and structural repairs to the Senior Housing Facilities. If
the Company and ILM Holding decide that any of the Senior Housing Facilities
should be expanded, the master lease agreement between the Company and ILM
Holding would be amended to include such expansion. During the initial term of
the master lease, which expires on December 31, 1999, the Company is obligated
to pay annual base rent for the use of all the Senior Housing Facilities in the
aggregate amount of $5,886,000 for calendar year 1995 (prorated based on the
lease commencement date) and $6,364,800 for calendar year 1996 and each
subsequent year. Beginning in January 1997 and for the remainder of the lease
term, the Company is also obligated to pay variable rent for each Senior Housing
Facility. Such variable rent is payable quarterly and will equal 40% of the
excess, if any, of the aggregate total revenues for the Senior Housing
Facilities, on an annualized basis, over $16,996,000. Variable rent expense
related to the first quarter of fiscal 1998 was $200,000.
-10-
ILM I LEASE CORPORATION
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
As noted above, the Company's master lease is scheduled to expire on
December 31, 1999. This period coincides with the end of ILM I's expected
holding period for its investments in the Senior Housing Facilities. While such
holding period is subject to change, the current Articles of Incorporation of
ILM I provide that the liquidation of ILM I must be completed by no later than
December 31, 2004. Any further renewals of the master lease beyond December 1999
would be subject to negotiation between the Company and ILM I and its
consolidated affiliate. Accordingly, since 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 I, there is no assurance that the Company's
operations will continue beyond December 1999.
The Company and ILM I continue to review various restructuring alternatives.
An independent investment banking firm has been retained by the Company and its
affiliates to assist in reviewing these strategic alternatives. The Company has
not fully evaluated any of these alternatives and is not in a position at this
time to recommend any actions to the Shareholders. There can be no assurance
that the Company will recommend taking any of the actions which may be
recommended by its investment bankers.
On July 29, 1996, the Company terminated the Agreement with AHC covering
eight Senior Housing Facilities leased by the Company (see "Note 3. "Notes to
Financial Statements"). Subsequent to terminating the property management
agreement, the Company retained Capital Senior Management 2, Inc. ("Capital") to
be the manager of the Senior Housing Facilities pursuant to a management
agreement ("Management Agreement") which commenced on July 29, 1996. Under the
terms of the Management Agreement, Capital will earn a base management fee equal
to 4% of the gross operating revenues and 25% of the amount by which the average
monthly net cash flow of the Senior Housing Facilities, as defined, for the
twelve-month period ending on the last day of each calendar month exceeds a
specified base amount. Each August 31, beginning on August 31, 1997, the base
amount will be increased annually based on the percentage increase in the
consumer price index. ILM I has guaranteed the payment of all fees due to
Capital under the terms of the Management Agreement.
The eight properties which the Company leases from ILM Holding averaged 96%
occupancy for the quarter ended November 30, 1997. Current annualized operating
income levels are sufficient to cover the base master lease payments at their
current annual level of $6,364,800, which will remain in effect throughout the
remaining term of the lease. As noted above, the master lease also provides for
the payment of variable rent beginning in January 1997. The Senior Housing
Facilities are currently generating gross revenues which are in excess of the
specified threshold in the variable rent calculation. Variable rent amounted to
$200,000 for the three months ended November 30, 1997.
The Company and ILM I have been pursuing additional steps to increase cash
flow and shareholder value. Several new programs were adopted during fiscal 1997
across the Company's portfolio which are resulting in increased revenues and
cash flow from the properties. These steps include increasing the number of
rentable apartment units as live-in facility managers move from the properties
and increasing rental rates at properties that have maintained high occupancy
levels and are located in strong markets. Another program to increase revenues
and cash flow involves pursuing the potential for future expansions of several
of the facilities which are located in areas that have particularly strong
markets for senior housing. Potential expansion candidates include the
facilities located in Raleigh, North Carolina, East Lansing, Michigan, Omaha,
Nebraska, Peoria, Illinois and Hot Springs, Arkansas. As part of this expansion
program, approximately two acres of land located adjacent to the Raleigh
facility were acquired by ILM Holding for $450,000 during the quarter ended
August 31, 1997. In addition, approximately two acres of land located adjacent
to the East Lansing facility and approximately three and one-half acres of
-11-
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
land located adjacent to the Omaha facility were acquired by ILM Holding during
the quarter ended November 30, 1997. In addition, an agreement has been obtained
by ILM Holding to purchase approximately five acres of land located adjacent to
the Peoria facility for approximately $600,000 and closing is expected to occur
during fiscal 1998 contingent on due diligence activities. The Hot Springs
facility already includes a vacant land parcel of approximately two acres which
could accommodate an expansion of the existing facility or the construction of a
new free-standing facility. Preliminary feasibility evaluations have been
completed for all of these potential expansions and pre-construction design and
construction-cost evaluations are underway for expansions of the facilities
located in Raleigh and Omaha.
Once the pre-construction design process is complete and projected expansion
construction costs are determined, the Company and ILM Holding will carefully
evaluate the costs and benefits before proceeding with the construction of any
of these expansions. If the Company and ILM Holding decide to proceed with any
of these expansions, the master lease agreement between the Company and ILM
Holding will be amended to include such expansions.
ILM Holding is currently negotiating with a major bank to provide a
construction loan facility that, if finalized, would provide up to $24.5 million
to fund the capital costs of these potential expansion programs. The
construction loan facility is expected to be secured by a first mortgage of the
Senior Housing Facilities operated by the Company and collateral assignment of
the Company's leases of such Senior Housing Facilities.
At November 30, 1997, the Company had cash and cash equivalents of
$3,036,000. Such amounts will be used for the Company's working capital
requirements. As noted above, under the terms of the master lease, 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. The Company
did not pay cash dividends in fiscal 1996 or fiscal 1997. The Company intends to
review this policy during the second half of fiscal 1998 and may or may not
determine to pay cash dividends in the future. Payment of dividends, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon such factors as the Company's financial condition, earnings, anticipated
investments and other relevant factors. The source of future liquidity is
expected to be from operating cash flow from the Senior Housing Facilities, net
of the 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.
-12-
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations
Three Months Ended November 30, 1997 versus the Three Months Ended
November 30, 1996
Revenues
Total Revenues were $4,758,000 for the quarter ended November 30, 1997
compared to $4,422,000 for the same period of the prior year, representing an
increase of $336,000 or 7.6%. Rental and other income from the Company's Senior
Housing Facilities operations increased $350,000 primarily as a result of
improved occupancies and increased rental rates at certain of the facilities
located in strong markets.
Expenses
Total expenses were $4,605,000 for the quarter ended November 30, 1997
compared to $4,112,000 for the same period in the prior year, representing an
increase of $493,000 or 11%. This increase was principally comprised of
increases in master lease expense of $200,000, dietary and food service
salaries, wages and expenses of $76,000, general and administrative expenses of
$164,000, and property management fees of $35,000. The increase in master lease
expense is the result of variable rent payments due under the master lease
agreement which were not due in the comparable period in the prior year. General
and administrative expenses increased principally as a result of the AHC
litigation expenses. The other increases noted above were the result of higher
operative levels.
Income Tax Expense
Income tax expense decreased by $63,000 or 50% as compared to the comparable
period in the prior year, primarily as a result of a decrease in income before
taxes of $157,000.
Net Income
Primarily as a result of the factors noted above, net income decreased from
$186,000 for the quarter ended November 30, 1996 to $92,000 for the quarter
ended November 30, 1997.
-13-
ILM I LEASE CORPORATION
PART II
Other Information
Item 1. Through 5. NONE
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Item 6. Exhibits and reports on form 8-K
- ----------------------------------------
(a) Exhibits: 27. Financial Data Schedule
(b) Reports on Form 8-K: NONE
-14-
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 I LEASE CORPORATION
-----------------------
By: /s/ J. William Sharman, Jr.
---------------------------
J. William Sharman, Jr.
President
Dated: May 1, 1998