10-Q 1 a2035192z10-q.txt FORM 10-Q ================================================================================ 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 NOVEMBER 30, 2000 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.) 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 Section 12(g) of the Act: Shares Of Common Stock $.01 Par Value ------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Shares of common stock outstanding as of November 30, 2000: 7,519,430. ================================================================================ Page 1 of 17 ILM I LEASE CORPORATION INDEX Part I. Financial Information PAGE ---- Item 1. Financial Statements Statements of Net Liabilities in Liquidation November 30, 2000 (Unaudited) and August 31, 2000......... 4 Statement of Changes in Net Liabilities in Liquidation For the three months ended November 30, 2000 (Unaudited).. 5 Statements of Operations For the three months ended November 30, 2000 and 1999 (Unaudited)...................................... 6 Statements of Changes in Shareholders' Equity For the three months ended November 30, 2000 and 1999 (Unaudited).......................................... 7 Statements of Cash Flows For the three months ended November 30, 2000 and 1999 (Unaudited)............................8 Notes to Financial Statements (Unaudited)................. 9-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13-15 Part II. Other Information............................................... 16 Item 6. Exhibits and Reports on Form 8-K.......................... 16 Signatures................................................................ 17 -2- ILM I LEASE CORPORATION PART I. FINANCIAL INFORMATION Item I. Financial Statements (see next page) -3- ILM I LEASE CORPORATION STATEMENTS OF NET LIABILITIES IN LIQUIDATION November 30, 2000 (Unaudited) and August 31, 2000 (LIQUIDATION BASIS) (Dollars in thousands, except per share data) ASSETS

See accompanying notes. ILM I LEASE CORPORATION STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION (LIQUIDATION BASIS) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data)

See accompanying notes. -5- ILM I LEASE CORPORATION STATEMENTS OF OPERATIONS For the three months ended November 30, 2000 and 1999 (Unaudited) (Dollars in thousands, except per share data)

The above loss per share of common stock is based upon the 7,519,430 shares outstanding for each period. See accompanying notes. -6- ILM I LEASE CORPORATION STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the three months ended November 30, 2000 and 1999 (Unaudited) (Dollars in thousands, except per share data)

See accompanying notes. -7- ILM I LEASE CORPORATION STATEMENTS OF CASH FLOWS For the three months ended November 30, 2000 and 1999 (Unaudited) (Dollars in thousands)

See accompanying notes. -8- 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 ILM I Lease Corporation's (the "Company") Annual Report on Form 10-K for the year ended August 31, 2000. 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. 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 U.S. generally accepted accounting principles for interim financial information, which requires 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, 2000, and revenues and expenses for each of the three-month periods ended November 30, 2000 and 1999. Actual results may differ from the estimates and assumptions used. Certain numbers in the prior period's financial statements have been reclassified to conform to the current period's presentation. The results of operations for the three-month period ended November 30, 2000, are not necessarily indicative of the results to be expected for the year ending August 31, 2001. The Company was incorporated on September 12, 1994 under the laws of the State of Virginia by ILM Senior Living, Inc., a Virginia finite-life corporation ("ILM I"), formerly PaineWebber Independent Living Mortgage Fund, Inc., to operate eight 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 Holding, Inc. ("ILM Holding"), as lessor, and a direct subsidiary of ILM I. The Company's sole business. prior to entering into a plan of liquidation as discussed below, was the operation of the Senior Housing Facilities. The Company leased the Senior Housing Facilities from ILM Holding, a subsidiary of ILM I that held title to the Senior Housing Facilities, pursuant to a Facilities Lease Agreement. The lease agreement was accounted for as an operating lease in the Company's financial statements until August 15, 2000. ILM I 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 indirect subsidiaries of ILM I, subject to the mortgage loans. Subsequently, these property-owning subsidiaries were merged into 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, which was assigned to the Company as of September 1, 1995 and subsequently terminated in July 1996. 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. Lawrence A. Cohen, who served through July 28, 1998 as a Director of the Company and President, Chief Executive Officer and Director of ILM I, has also served in various management capacities at Capital Senior Living Corporation ("CSLC"), an affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of Capital Senior Living Corporation. As a result, the Management Agreement with Capital was considered a related party transaction (see Note 3) through July 28, 1998. -9- ILM I LEASE CORPORATION Notes to Financial Statements (Unaudited) (continued) 1. GENERAL (CONTINUED) -------------------- On August 15, 2000, ILM I completed the merger with CSLC and caused ILM Holding to cancel and terminate the Facilities Lease Agreement effective August 15, 2000. The Company also terminated the Management Agreement effective August 15, 2000. 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 previous relationship with ILM I, on November 8, 2000, the Company's Board of Directors voted to pursue a plan of liquidation. Thereafter, the Company changed its basis of accounting as of August 31, 2000, 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. No specific charges were taken as a result of the Company's changing its basis of accounting. 2. THE FACILITIES LEASE AGREEMENT ------------------------------ ILM Holding (the "Lessor") leased the Senior Housing Facilities to the Company (the "Lessee") pursuant to a Facilities Lease Agreement. Such lease was extended on a month-to-month basis on November 16, 1999, beyond its original expiration date of December 31, 1999. On August 15, 2000, ILM I completed its merger with CSLC and caused ILM Holding to cancel and terminate the Facilities Lease Agreement effective August 15, 2000. The lease was accounted for as an operating lease in the Company's financial statements. -10- ILM I LEASE CORPORATION Notes to Financial Statements (Unaudited) (continued) 2. THE FACILITIES LEASE AGREEMENT (CONTINUED) Descriptions of the properties covered by the Facilities Lease Agreement between the Company and ILM Holding prior to the Facilities Lease Agreement's termination on August 15, 2000, are summarized as follows:

(1) Until August 15, 2000, the Company operated 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. ILM II Senior Living, Inc. ("ILM II") sold its interest in Villa Santa Barbara on August 15, 2000, to CSLC. Accordingly, ILM II's interest in the Santa Barbara facility was transferred to CSLC on August 15, 2000. (2) Rentable units represent the number of apartment units and is a measure commonly used in the real estate industry. Resident capacity equals the number of bedrooms contained within the apartment units and corresponds to measures commonly used in the healthcare industry. Prior to its termination on August 15, 2000, pursuant to the Facilities Lease Agreement the Company paid annual base rent for the use of the Senior Housing Facilities in the aggregate amount of $6,364,800. 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 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 remained with the Senior Housing Facility at the termination of the lease. The Company also paid variable rent, on a quarterly basis, for each Senior Housing Facility in an amount equal to 40% of the excess of aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $16,996,000. Variable rent was $0 and $302,000 for the three-month periods ended November 30, 2000 and 1999, respectively. 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 Arkansas, California and Kansas are licensed by such states to provide assisted living services. In addition, various health and safety regulations and standards, which are enforced by state and local authorities, apply to the operation of all the Senior Housing Facilities. Violations of such health and safety standards could result in fines, penalties, closure of a Senior Housing Facility, or other sanctions. -11- ILM I LEASE CORPORATION Notes to Financial Statements (Unaudited) (continued) 3. RELATED PARTY TRANSACTIONS -------------------------- The Company retained Capital to be the property manager of the Senior Housing Facilities pursuant to the Management Agreement which commenced on July 29, 1996. Lawrence A. Cohen, who served through July 28, 1998 as a Director of the Company and President, Chief Executive Officer and Director of ILM I, has also served in various management capacities at CSLC, an affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of CSLC. Under the Management Agreement, Capital generally was required to perform all operational functions necessary to operate the Senior Housing Facilities other than certain administrative functions. The functions performed by Capital included periodic reporting to and coordination 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 earned 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, exceeded 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 Senior Housing Facility expansion costs. ILM I guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. For the three-month periods ended November 30, 2000 and 1999, Capital earned property management fees from the Company of $0 and $276,000, respectively. 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. received a fee equal to 7% of the total development costs of these expansions if they are pursued. ILM Holding reimbursed the Company for all costs related to these potential expansions including fees to Capital Senior Development, Inc. For the three-month periods ended November 30, 2000 and 1999, Capital Senior Development, Inc. earned no fees from the Company for managing pre-construction development activities for potential expansions of the Senior Housing Facilities. Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the three-month periods ended November 30, 2000 and 1999, Greenberg Traurig earned fees from the Company of $0 and $14,000, respectively. Accounts payable - Capital Senior Living Corporation at November 30, 2000, and August 31, 2000, includes approximately $140,000 payable to CSLC as part of the final settlement of property-level payables and receivables at lease termination as well as base rent of $265,000 and variable rent of $254,000 payable to ILM Holding, Inc. (and its successors). Accounts payable - related party at November 30, 2000 and August 31, 2000, includes $8,000 for accrued legal fees due to Greenberg Traurig, Counsel to the Company and a related party. -12- ILM I LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Prior to its termination on August 15, 2000, 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. Pursuant to the Facilities Lease Agreement, the Company paid annual base rent for the use of all the Senior Housing Facilities in the aggregate amount of $6,364,800. 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 $16,996,000. Variable rent was $0 and $302,000 for the three-month periods ended November 30, 2000 and 1999, respectively. On August 15, 2000, ILM I completed the merger with CSLC and caused ILM Holding to cancel and terminate the Facilities Lease Agreement effective August 15, 2000. The Company also terminated the Management Agreement effective August 15, 2000. 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 previous relationship with ILM I, on November 8, 2000, the Company's Board of Directors voted to pursue a plan of liquidation. Thereafter, the Company changed its basis of accounting as of August 31, 2000, 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. No specific charges were taken as a result of the Company's changing its basis of accounting. LIQUIDITY AND CAPITAL RESOURCES Occupancy levels for the eight properties in which the Company had invested averaged 0% and 91% for the three-month periods ended November 30, 2000 and 1999, respectively. Base rent payments of $6,364,800 were in effect throughout the term of the lease until August 15, 2000. As noted above, the Facilities Lease Agreement provided for the payment of variable rent. At November 30, 2000, the Company had cash and cash equivalents of $545,000 compared to $644,000 at August 31, 2000. The decrease of $99,000 is primarily attributable to the payment of remaining payables. Remaining amounts of cash will be used for the Company's working capital requirements. The Company does not currently anticipate the need to engage in any borrowing activities. The Company did not pay cash dividends during the past fiscal years 2000 and 1999. Because the Company is pursuing a plan of liquidation, it is not anticipated that cash dividends will be paid in the future. -13- 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, 2000 VERSUS THREE MONTHS ENDED NOVEMBER 30, 1999 REVENUES Total revenues were $4,000 for the three-month period ended November 30, 2000 compared to $5,007,000 for the same period of the prior year, representing a decrease of $5,003,000, or 99.9%. This decrease is the result of a $5,004,000 or 100.0% decrease in rental income in the three months ended November 30, 2000, due to termination of the Facilities Lease Agreement and the transfer of the properties to CSLC at completion of ILM I's merger on August 15, 2000. Interest income increased $1,000 or 33.3%. EXPENSES Total expenses were $26,000 for the three-month period ended November 30, 2000, compared to $5,069,000 for the same period in the prior year, representing a decrease of $5,043,000, or 99.5%. This overall decrease in expenses was due to termination of the Facilities Lease Agreement and transfer of the properties to CSLC at completion of ILM I's merger on August 15, 2000. As reflected on the accompanying Statements of Operations, at November 30, 2000, operating expenses individually decreased to $0 or 100.0% when compared to the previous year due to cessation of operations with the following exceptions: general and administrative costs decreased $85,000 or 96.6% due chiefly to a $70,000 decrease in insurance expense and a 100.0% decrease in all other general and administrative costs; and professional fees decreased $48,000 or 84.2% due to decreased legal and financial service requirements. Depreciation expense decreased $260,000 or 100.0% as all fixed assets were fully depreciated by the lease termination date. INCOME TAX EXPENSE Income tax expense increased $8,000 or 100% due to the combination of a loss before taxes of $22,000 and the utilization of an $8,000 net deferred tax asset resulting in a $40,000 or 181.8% decrease in loss before taxes. NET LOSS Primarily as a result of the factors noted above, net loss decreased $32,000 or 51.6%, from net loss of $62,000 for the three months ended November 30, 1999, to net loss of $30,000 for the three months ended November 30, 2000. -14- ILM I LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. -15- ILM I LEASE CORPORATION PART II-OTHER INFORMATION ITEM 1. THROUGH 5. NONE ------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: None. -16- 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/ Jeffry R. Dwyer ------------------------------ Jeffry R. Dwyer President Dated: _JANUARY 15, 2001 -17-

ILM I LEASE CORP 10-Q