10-K 1 a2033354z10-k.txt FORM 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: AUGUST 31, 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 of organization) (I.R.S. Employer Identification No.) 1750 Tysons Boulevard, Suite 1200, McLean, 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 Title of each class on 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ Indicate by check mark whether the registrant (1) has filed all reports 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 August 31, 2000: 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. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS FORM 10-K REFERENCE -------------------------------------------------------------- ------------------- Registration Statement on Form 10 of registrant Part III, Part IV dated July 20, 1995, as supplemented [33 Act filing #33-27653]

Current Report on Form 8-K of registrant dated June 7, 2000 =============================================================================== ILM I LEASE CORPORATION 2000 FORM 10-K TABLE OF CONTENTS

ILM I LEASE CORPORATION PART I ITEM 1. BUSINESS ILM I Lease Corporation (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 senior citizens (the "Senior Housing Facilities") under the terms of 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 was the operation of the Senior Housing Facilities. On August 15, 2000, the Facilities Lease Agreement was terminated, and the Company's sole business ceased. ILM I contributed $700,000 to the Company 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 Angeles Housing Concepts, Inc. ("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 then majority-owned, indirect subsidiaries of ILM I, subject to the mortgage loans. Subsequently, these property-owning subsidiaries of ILM I were merged into ILM Holding. As part of the fiscal 1994 settlement agreement with AHC (the "Settlement Agreement"), ILM Holding retained AHC 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. As discussed further in Item 7, the management agreement with AHC was terminated in July 1996. ILM I is a public company subject to the reporting obligations of the Securities and Exchange Commission. ILM I had elected to qualify and 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 so-called "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. ILM Holding (the "Lessor"), a then majority-owned subsidiary of ILM I, 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. The lease was accounted for as an operating lease in the Company's financial statements through August 31, 2000. ILM I completed the merger with Capital Senior Living Corporation ("CSLC") on August 15, 2000, and caused ILM Holding to cancel and terminate the Facilities Lease 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 its previous relationship with ILM I, on November 8, 2000, the Company's Board of Directors voted to pursue a plan of liquidation. As a result, the Company changed its basis of accounting as of August 31, 2000, from the going-concern basis to the liquidation basis. I-1 ILM I LEASE CORPORATION ITEM 1. BUSINESS (CONTINUED) In July 1996, following the termination of the property management agreement with AHC, and 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, 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 through July 28, 1998. 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 the Lessor, was responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Also, any fixed assets of the Company at a Senior Housing Facility would remain with the Senior Housing Facility at the termination of the lease. 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. For the fiscal years ended August 31, 2000 and 1999, variable rent expense was $1,183,000 and $1,164,000, respectively. I-2 ILM I LEASE CORPORATION ITEM 1. BUSINESS (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) See Notes to the Financial Statements filed with this Annual Report for a description of the agreements through which the Company has leased these facilities. (2) 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"). 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. (3) 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. The Senior Housing Facilities were subject to competition from similar properties in the vicinities in which they are located. The properties are located in areas with significant senior citizen populations and, as a result there are, and will likely continue to be, a variety of competing projects aimed at attracting senior residents. Such projects will generally compete on the basis of rental rates, services, amenities and location. The Company had no real estate investments located outside the United States. The Company's sole business was the operation of the Senior Housing Facilities. Therefore, presentation of information about industry segments is not applicable. I-3 ILM I LEASE CORPORATION ITEM 1. BUSINESS (CONTINUED) 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 were licensed by such states to provide assisted living services. In addition, various health and safety regulations and standards, which are enforced by state and local authorities, apply to the operation of all the Senior Housing Facilities. Violations of such health and safety standards could result in fines, penalties, closure of a Senior Housing Facility, or other sanctions. Through June 18, 1997 and subject to the supervision of the Company's Board of Directors, assistance in managing the business of the Company was provided by PaineWebber Lease Advisor, L.P. ("PaineWebber"). For discussion purposes, PaineWebber will refer to PaineWebber Lease Advisor, L.P. and all affiliates of PaineWebber that provided services to the Company in the past. PaineWebber resigned from this position effective as of June 18, 1997, although PaineWebber agreed to perform certain administrative services for the Company and its affiliates through August 31, 1997. Through the date of its resignation, PaineWebber performed the day-to-day operations of the Company and acted as the investment advisor and consultant for the Company. PaineWebber provided cash management, accounting, tax preparation, financial reporting, investor communications and relations as well as asset management services to the Company. These services are now being provided to the Company, subject to the supervision of the Company's Board of Directors, by various companies, advisors and consultants including Greenberg Traurig, Fleet Bank, Ernst & Young LLP and MAVRICC Management Systems, Inc. There are currently three Directors of the Company. The Directors are subject to removal by the vote of the holders of a majority of the outstanding shares of the Company's common stock. The terms of transactions between the Company and PaineWebber and similar disclosures with respect to relationships of other related parties which provide services to the Company are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions. As discussed further in Item 7, on July 29, 1996, the Company terminated the property management agreement with AHC and retained Capital to be the property manager of the Senior Housing Facilities, and ILM I guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. 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, an affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of CSLC. As a result, through July 28, 1998, Capital was considered a related party (see Item 13). For the years ended August 31, 2000 and 1999, Capital earned property management fees from the Company of $955,000 and $1,008,000 respectively. I-4 ILM I LEASE CORPORATION ITEM 2. PROPERTIES Until August 15, 2000, the Company had leased the eight operating properties referred to under Item 1 above, to which reference is made for the description, name and location of such properties. Average occupancy levels for each fiscal quarter during 2000, along with an average for the year, are presented below for each property:

ITEM 3. LEGAL PROCEEDINGS On July 29, 1996, the Company and ILM Holding (collectively for this Item 3, the "Companies") terminated a property management agreement with AHC covering the eight Senior Housing Facilities leased by the Company from ILM Holding. The management agreement with AHC was terminated for "cause" pursuant to 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 Companies alleged, among other things, that AHC willfully performed actions specifically in violation of the management agreement and that such actions caused damages to the Companies. Due to the termination of the management 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 alleged that the management agreement was wrongfully terminated for cause and requested damages which included the payment of the 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 that the management agreement could have been terminated without cause, and recovery of attorneys' fees and expenses. I-5 ILM I LEASE CORPORATION ITEM 3. LEGAL PROCEEDINGS (CONTINUED) The aggregate amount of damages against all parties as requested in AHC's counterclaim exceeded $2,000,000. 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 did 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. On February 4, 1997, AHC filed a complaint in the Superior Court of the State of California against Capital, the new property manager; Lawrence A. Cohen, who, through July 28, 1998 was a Director of the Company and President, Chief Executive Officer and Director of ILM I, and others alleging that the defendants intentionally interfered with AHC's property management agreement (the "California litigation"). The complaint sought 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. At a Board 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 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. Legal fees paid by the Company and Lease II on behalf of Mr. Cohen totaled $229,000 as of August 31, 2000. The Company's Board also concluded that, subject to certain conditions, the Company or its affiliates should pay reasonable legal fees and expenses incurred by Capital in the California litigation. At August 31, 2000, the amount advanced to Capital by the Company and Lease II for Capital's California litigation costs totaled approximately $563,000. On August 18, 1998, the Company and its affiliates along with Capital and its affiliates entered into a Settlement Agreement with AHC. The Company and Lease II agreed to pay $1,625,000 and Capital and its affiliates agreed to pay $625,000 to AHC in settlement of all claims including those related to the Virginia litigation and the California litigation. The Company and its affiliates also entered into an agreement with Capital and its affiliates to mutually release each other from all claims that any such parties may have against each other, other than any claims under the property management agreements. On September 4, 1998, the full settlement amounts were paid to AHC and its affiliates with the Company paying $975,000 and Lease II paying $650,000. The Company has pending claims incurred in the normal course of business which, in the opinion of the Company's Board of Directors, will not have a material effect on the financial statements of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. I-6 ILM I LEASE CORPORATION PART II ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED STOCKHOLDER MATTERS Prior to September 1, 1995, the Company was a wholly-owned subsidiary of ILM I. Pursuant to a reorganization and distribution agreement, ILM I 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 I 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 I common stock. No certificates or scrip representing fractional shares of the Company's common stock were issued to holders of ILM I common stock as part of the distribution. In lieu of receiving fractional shares, each holder of ILM I 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. At August 31, 2000, there were 4,952 record holders of the Company's shares. The shares do not trade on an established exchange and the only market that has developed is a secondary market; therefore, little resale activity occurs. Although PaineWebber and others may endeavor to assist Shareholders desiring to sell their shares by attempting to match requests to sell shares with requests to purchase shares, such transfers are not expected to be frequent. The Company did not pay cash dividends in fiscal years 2000, 1999, and 1998. Because the Company is pursuing a plan of liquidation, it is not anticipated that cash dividends will be paid in the future. On August 15, 2000, ILM I completed the merger with CSLC and certain affiliates of Capital, and caused ILM Holding to cancel and terminate the Facilities Lease 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, subsequent to the fiscal year end, on November 8, 2000, the Company's Board of Directors voted to pursue a plan of liquidation. As a result, 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. II-1 ILM I LEASE CORPORATION ITEM 6. SELECTED FINANCIAL DATA ILM I LEASE CORPORATION (Dollars in thousands, except per share data)

The above selected financial data should be read in conjunction with the financial statements and related notes appearing in item 14 of this annual report. II-2 ILM I LEASE CORPORATION ITEM 7. 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 Facilities 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 property-owning subsidiaries of ILM I were merged into ILM Holding, which was then also a majority-owned subsidiary of ILM I. As part of the fiscal 1994 Settlement Agreement with AHC, ILM Holding retained AHC 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. As discussed further below, the management agreement with AHC was terminated in July 1996. ILM I has elected to qualify and 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 so-called "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. 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 Company, as 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 the Lessor, was responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Also, any fixed assets of the Company at a Senior Housing Facility would remain with the Senior Housing Facility at the termination of the lease. 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. For the fiscal years ended August 31, 2000 and 1999, variable rent expense was $1,183,000 and $1,164,000, respectively. As noted above, the Company's Facilities Lease Agreement was terminated effective August 15, 2000 due to the merger of ILM I with CSLC. The Company also terminated the Management Agreement effective August 15, 2000. 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 previous relationship with ILM I, on November 8, 2000, the Company's II-3 ILM I LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Board of Directors voted to pursue a plan of liquidation. As a result, 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. On July 29, 1996, the Company terminated the management agreement with AHC covering eight Senior Housing Facilities leased by the Company (see "Item 3, Legal Proceedings") and retained Capital to be the manager of the Senior Housing Facilities. ILM I had guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. 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. As a result, the Management Agreement with Capital was considered a related party transaction through July 28, 1998. 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 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 facility expansion costs. On February 4, 1997, AHC filed a complaint in the Superior Court of the State of California against Capital, the new property manager; Lawrence A. Cohen, who, through July 28, 1998 was a Director of the Company and President, Chief Executive Officer and Director of ILM I, and others alleging that the defendants intentionally interfered with AHC's property management agreement (the "California litigation"). The complaint sought 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. At a Board 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 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. Legal fees paid by the Company and Lease II on behalf of Mr. Cohen totaled $229,000 as of August 31, 2000. The Company's Board also concluded that, subject to certain conditions, the Company or its affiliates should pay reasonable legal fees and expenses incurred by Capital in the California litigation. At August 31, 2000, the amount advanced to Capital by the Company and Lease II for Capital's California litigation costs totaled approximately $563,000. Occupancy levels for the eight properties which the Company leased from ILM Holding through August 15, 2000 averaged 91% and 94% for the fiscal years ended August 31, 2000 and 1999, respectively. The Senior Housing Facilities generated sufficient net cash flow to cover the base rent payments of $6,364,800 per year since the inception of the Company's operations. As noted above, the Facilities Lease Agreement also provided for the payment of variable rent beginning in January 1997. The Senior Housing Facilities generated gross revenues in excess of the specified threshold in the variable rent calculation. Annualized operating income levels were sufficient to cover the Company's base and variable rent obligations to ILM Holding. In fiscal years ended August 31, 2000 and 1999, the Company had variable rent expense of $1,183,000 and $1,164,000, respectively. At August 31, 2000, the Company had cash and cash equivalents of $644,000 compared to $1,066,000 at August 31, 1999. The decrease of $422,000 is primarily attributable to the payment of property-level liabilities as a result of the termination of the Facilities Lease Agreement and investment in capital improvements to a lesser degree, offset by other cash flows provided by operating activities. Furthermore, the Company does not currently anticipate engaging in any borrowing activities. The Company did not pay cash dividends in fiscal years 2000, 1999 and 1998. Because the Company is pursuing a plan of liquidation, it is not anticipated that cash dividends will be paid in the future. II-4 ILM I LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS 2000 COMPARED TO 1999 REVENUES. Total revenues were $19,294,000 for the year ended August 31, 2000 compared to $19,923,000 for the year ended August 31, 1999, representing a decrease of $629,000 or 3.2%. Rental and other income from the Company's senior housing operations decreased $632,000, or 3.2%, primarily as a result of a 50% decrease in rental income in the final month of the fiscal year as the properties were transferred to CSLC at completion of ILM I's merger on August 15, 2000. Interest income increased $3,000, or 18.8%, to $9,000 in fiscal year 2000, compared to $16,000 in fiscal year 1999, primarily due to an increase in cash and cash equivalents experienced throughout most of fiscal year 2000. EXPENSES. Total expenses were $19,833,000 in fiscal year 2000 compared to $19,530,000 in fiscal year 1999 representing an increase in expenses of $303,000 or 1.6%. Although overall expenses remained comparable between periods, depreciation expense increased $133,000, or 24.1%, due to recognition of changes in remaining useful lives for certain assets purchased in 1999 and prior to conform to the lease expiration date, as such assets are not subject to repurchase by ILM Holding. Administrative salaries, wages and expenses increased $121,000, or 8.5%, while general and administrative expenses increased $221,000, or 99.6% due mainly to a $103,000 or 118.4% increase in Director's & Officer's insurance and a $40,000 or 22.3% increase in insurance costs at the property level as well as minor increases in other general and administrative costs as well. Professional fees increased $109,000 or 39.9% due to increases in audit and financial service fees associated with the lease termination and change to a liquidation basis of accounting. These increases were offset by a $222,000 or 3.0% decrease in master lease rent expense due to termination of the Facilities Lease Agreement on August 15, 2000 as well as minor decreases in certain other expenses. INCOME TAX EXPENSE. Income tax expense decreased $174,000 or 63.7%, from benefit of $273,000 in fiscal 1999 to expense of $99,000 in fiscal 2000, after giving effect to the additional $298,000 increase in the valuation allowance in 2000 on the Company's deferred tax asset. NET INCOME (LOSS). Primarily as a result of the factors discussed above, net income decreased $754,000 or 628.4% from income of $120,000 in fiscal 1999 to net loss of $634,000 in fiscal 2000. 1999 COMPARED TO 1998 REVENUES. Total revenues were $19,923,000 for the year ended August 31, 1999 compared to $19,294,000 for the year ended August 31, 1998, representing an increase of $629,000 or 3.3%. Rental and other income from the Company's senior housing operations increased $675,000, or 3.5%, primarily as a result of increases in rental rates at certain of the facilities located in strong markets. Interest income decreased $46,000, or 74.2%, to $16,000 in fiscal year 1999, compared to $62,000 in fiscal year 1998, primarily due to a decrease in cash and cash equivalents experienced throughout most of fiscal year 1999. EXPENSES. Total expenses were $19,530,000 in fiscal year 1999 compared to $19,729,000 in fiscal year 1998 representing a decrease in expenses of $199,000 or 1.0%. Although overall expenses remained comparable, depreciation expense increased $256,000, or 86.2%, due to recognition of changes in remaining useful lives for certain assets purchased in 1999 and prior to conform to the lease expiration date, as such assets are not subject to repurchase by ILM Holding. Administrative salaries, wages and expenses increased $202,000, or 16.6%, while general and administrative expenses decreased $42,000, or 15.9%. These increases were offset, in part, by a decrease of $375,000 or 100% in termination fee expense and a decrease of $850,000, or 75.7% in professional fees as a result of reduced legal fees subsequent to the AHC litigation settlement. The increases in other operating costs cited above were the result of higher operating levels associated with improved occupancies. II-5 ILM I LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAX EXPENSE. Income tax expense increased $327,000 or 605.6%, from a benefit of $54,000 in fiscal 1998 to expense of $273,000 in fiscal 1999, after giving effect to the additional $115,000 increase in the valuation allowance in 1999 on the Company's deferred tax asset. The effective income tax rate was 69% in fiscal 1999 and 7% in fiscal 1998. NET INCOME (LOSS). Primarily as a result of the factors discussed above, net income increased $501,000 or 131.4% from a net loss of $381,000 in fiscal 1998 to net income of $120,000 in fiscal 1999. INCOME TAX EXPENSE. Income tax benefit decreased from $192,000 in fiscal 1997 to a benefit of $54,000 in fiscal 1998, after giving effect to the $120,000 valuation allowance in 1998 on the Company's deferred tax asset. The effective income tax rate was 7% in fiscal 1998 and 40% in fiscal 1997. NET INCOME (LOSS). Primarily as a result of the factors discussed above, net loss increased from a net loss of $287,000 in fiscal 1997 to a net loss of $381,000 in fiscal 1998. INFLATION The Company completed its fifth full year of operations in fiscal year 2000. The effects of inflation and changes in prices on the Company's operating results to date have not been significant. II-6 ILM I LEASE CORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FORWARD-LOOKING INFORMATION CERTAIN STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL 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 ANNUAL 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 ANNUAL REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THE COMPANY MAKES ABSOLUTELY NO PROMISES, GUARANTEES, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY THEREOF. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are included under Item 14 of this annual report. TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. II-7 ILM I LEASE CORPORATION PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There currently are three Directors of the Company. The Directors are subject to removal by the vote of the holders of a majority of the outstanding shares of the Company's common stock. The Directors are responsible for the general policies of the Company, but they are not required to personally conduct the business of the Company in their capacities as Directors. (a) and (b) The names and ages of the Directors and Executive Officers of the Company during fiscal 1999 are as follows:

* The date of incorporation of the Company. (c) There is no family relationship among any of the current Directors or Officers. All of the current Directors and Officers of the Company have been elected to serve until the Company's next annual meeting. (d) The business experience of each of the Directors and Executive Officers of the Company is as follows: JEFFRY R. DWYER is President, Secretary and Director of the Company. Mr. Dwyer has served as President of the Company since March 9, 1999. Mr. Dwyer has been a shareholder of Greenberg Traurig, which has provided legal services to the Company and its affiliates since June 1997. From 1993 to 1997 Mr. Dwyer was a partner with the law firm of Akin, Gump, Strauss, Hauer & Feld in the District of Columbia. Prior to joining Akin, Gump, Strauss, Hauer & Feld, Mr. Dwyer was a partner with the law firm of Morrison & Foerster from 1989 to 1993. Mr. Dwyer also presently serves as Secretary and a Director of ILM II and also serves as President, Secretary and Director of Lease II. Mr. Dwyer has written several law review articles and a major treatise on real estate financing and taught Real Estate Planning as an Adjunct Professor at the Georgetown University Law Center. Mr. Dwyer graduated from Georgetown University and received his law degree from the Georgetown University Law Center. JULIEN G. REDELE is a Director and served as President of the Company from July 28, 1998 through March 9, 1999. Mr. Redele' is one of the original founders of SFRE, Inc., a Dutch owned real estate investment and development firm which has served since 1963 as advisor to Dutch institutional, corporate and individual investors active in the United States. Mr. Redele serves as a Director of the Island Preservation Partnership. Mr. Redele attended Westersingel Business School, Rotterdam, where he studied economics, law and finance. Mr. Redele' also presently serves as Director of Lease II. J. WILLIAM SHARMAN, JR. is a Director and served as President of the Company from September 18, 1997 through July 28, 1998. Mr. Sharman also presently serves as a Director of Lease II and as President and Director of ILM II. Mr. Sharman is the Chairman of the Board and CEO of Lancaster Hotels and Resorts, Inc., a hotel management company. Mr. Sharman served for ten years as Chairman of the Board and President of the Lancaster Group, Inc., a real estate development firm based in Houston, Texas, which is the predecessor of Lancaster Hotel Management, L.C. and Bayou Equities, Inc. Mr. Sharman serves as a Director of Small Luxury Hotels, Ltd. of the United Kingdom, an international hotel marketing and reservations firm, and also serves on the Board of Trustees of St. Edwards University in Austin, Texas. He has a Bachelor of Science degree from the University of Notre Dame. III-1 ILM I LEASE CORPORATION ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) (e) Except for the Feldman litigation as discussed below, none of the current Directors and Officers were involved in legal proceedings which are material to an evaluation of his or her ability or integrity as a Director or Officer. On May 8, 1998 Andrew A. Feldman and Jeri Feldman, as Trustees for the Andrew A. & Jeri Feldman Revocable Trust dated September 18, 1990 commenced a purported class action on behalf of that trust and all other shareholders of ILM I and ILM II (affiliates of the Company, as previously described) in the Supreme Court of the State of New York, County of New York naming as defendants ILM I, ILM II and Lawrence A. Cohen, Jeffry R. Dwyer, Julien G. Redele, Carl J. Schramm and J. William Sharman, Jr. as the directors of both corporations. The class action complaint alleged that the directors engaged in wasteful and oppressive conduct and breached fiduciary duties in preventing the sale or liquidation of the assets of ILM I and ILM II, diverting certain of their assets. The complaint sought compensatory damages in an unspecified amount, punitive damages, the judicial dissolution of ILM I and ILM II, an order requiring the directors to take all steps to maximize Shareholder value, including either an auction or liquidation, and rescinding certain agreements, and attorney's fees. On July 8, 1998, the defendants moved to dismiss the complaint on all counts. On October 15, 1999, the parties entered into a revised Stipulation of Settlement and filed it with the Court, which approved the settlement, by order dated October 21, 1999. In issuing that order the Court entered a final judgment dismissing the action and all non-derivative claims of the settlement class against the defendants with prejudice. This litigation was settled at no cost to ILM I and ILM II. As part of the settlement, Capital Senior Living Corporation increased its proposed merger consideration payable to the ILM I and ILM II shareholders and is also responsible for a total of approximately $1.1 million in plaintiffs' attorneys fees and expenses. (f) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the Officers and Directors of the Company, and persons who own more than ten percent of the Company's outstanding common stock, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and ten-percent beneficial holders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Company believes that, during the year ended August 31, 2000, there was compliance with all filing requirements applicable to its Officers and Directors and ten-percent beneficial holders. ITEM 11. EXECUTIVE COMPENSATION The Company's Directors each receive annual compensation of $12,000 plus $500 for attending each Board of Directors meeting and reimbursement for expenses incurred in attending meetings and as a result of other work performed for the Company. Officers of the Company are not compensated. Jeffry R. Dwyer receives compensation from and is a shareholder of Greenberg Traurig, which acts as Counsel to the Company and its affiliates. The former officers of the Company who were also officers of PaineWebber received compensation from PaineWebber which indirectly related to services to the Company because the Company was required to pay certain fees to PaineWebber as described in Item 13. When PaineWebber resigned as advisor to the Company, the former officers resigned effective the same date; therefore no services were provided by such persons subsequent to June 18, 1997. Lawrence A. Cohen, who was a Director of the Company until July 28, 1998, received compensation from and was an employee of Capital Senior Living Corporation, an affiliate of Capital and a related party through July 28, 1998. III-2 ILM I LEASE CORPORATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) As of the date hereof, no person of record owns or is known by the Company to own beneficially more than five percent of the outstanding shares of common stock of the Company. (b) The Directors and Officers of the Company do not have any direct or indirect ownership of shares of the Company's common stock as of the date hereof. (c) There exists no arrangement, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company retained Capital to be the property manager of the Senior Housing Facilities pursuant to a Management Agreement which commenced on July 29, 1996 and terminated on August 15, 2000. As discussed in Note 1, 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, 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 include 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, exceeds a specified base amount. Each August 31, beginning on August 31, 1997, the base amount was increased based on the percentage increase in the Consumer Price Index as well as 15% of Facility expansion costs. ILM I guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. For the years ended August 31, 2000 and 1999, Capital earned property management fees from the Company of $955,000 and $1,008,000, respectively. At August 31, 2000, the Company has accounts payable to CSLC of $659,000. On February 4, 1997, AHC filed a complaint in the Superior Court of the State of California against Capital, the new property manager; Lawrence A. Cohen, who, through July 28, 1998 was a Director of the Company and President, Chief Executive Officer and Director of ILM I, and others alleging that the defendants intentionally interfered with AHC's property management agreement (the "California litigation"). The complaint sought 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. At a Board 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 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. Legal fees paid by the Company and Lease II on behalf of Mr. Cohen totaled $229,000 as of August 31, 2000. The Company's Board also concluded that, subject to certain conditions, the Company or its affiliates should pay reasonable legal fees and expenses incurred by Capital in the California litigation. At August 31, 2000, the amount advanced to Capital by the Company and Lease II for Capital's California litigation costs totaled approximately $563,000. No amounts were advanced in fiscal year 2000. 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 expansion 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 years ended August 31, 2000 and 1999, Capital Senior Development, Inc. earned fees from the Company of $0 and $41,000, respectively, for managing pre-construction development activities for potential expansions of the Senior Housing Facilities. III-3 ILM I LEASE CORPORATION ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED) Jeffry R. Dwyer, President, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2000 and 1999, Greenberg Traurig earned fees from the Company of $32,000 and $64,000, respectively. III-4 ILM I LEASE CORPORATION PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES: ---------------------------------- The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. (3) EXHIBITS: -------- The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this Report. (b) The Company filed a Current Report on Form 8-K dated June 7, 2000, reporting the impending termination of the Facilities Lease Agreement between the Company and ILM I and its effect on the Company's value and continued existence. See (a)(3) above. (c) Financial Statement Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. IV-1 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. ILM I LEASE CORPORATION By: /s/ Jeffry R. Dwyer ------------------------------ Jeffry R. Dwyer President (Principal Accounting Officer) Dated: December 13, 2000 ----------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacity and on the dates indicated. By: /s/ Jeffry R. Dwyer Date: December 13, 2000 ------------------------------------------- ----------------- Jeffry R. Dwyer Director By: /s/ Julien G. Redele Date: December 13, 2000 ------------------------------------------- ----------------- Julien G. Redele Director By: /s/ J. William Sharman, Jr. Date: December 13, 2000 ------------------------------------------ ----------------- J. William Sharman, Jr. Director

IV-2 ILM I LEASE CORPORATION ANNUAL REPORT ON FORM 10-K ITEM 14(a)(3) ILM I LEASE CORPORATION INDEX TO EXHIBITS

IV-3 ILM I LEASE CORPORATION ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) AND (2) AND 14(d) ILM I LEASE CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Financial statement schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto. F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Shareholders of ILM I Lease Corporation: We have audited the accompanying statement of net liabilities in liquidation of ILM I Lease Corporation as of August 31, 2000, the balance sheet as of August 31, 1999, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended August 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company has changed its basis of accounting as of August 31, 2000, from the going-concern basis to the liquidation basis. In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of ILM I Lease Corporation at August 31, 1999, their net liabilities in liquidation at August 31, 2000, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2000, in conformity with generally accepted accounting principles in the United States applied on the basis described in the preceding paragraph. ERNST & YOUNG LLP Dallas, Texas October 24, 2000 except for Note 1, as to which the date is November 8, 2000 F-2 ILM I LEASE CORPORATION Statement of Net Liabilities in Liquidation August 31, 2000 (LIQUIDATION BASIS) (Dollars in thousands, except per share data)

See accompanying notes. F-3 ILM I LEASE CORPORATION BALANCE SHEET August 31, 1999 (GOING-CONCERN BASIS) (Dollars in thousands, except per share data)

See accompanying notes. F-4 ILM I LEASE CORPORATION STATEMENTS OF OPERATIONS For the years ended August 31, 2000, 1999 and 1998 (Dollars in thousands, except per share data)

The above net (loss) income per share of common stock is based upon the weighted average number of shares outstanding for the years ended August 31, 2000, 1999 and 1998 of 7,519,430. See accompanying notes. F-5 ILM I LEASE CORPORATION STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended August 31, 2000, 1999 and 1998 (Dollars in thousands, except per share data)

See accompanying notes. F-6 ILM I LEASE CORPORATION STATEMENTS OF CASH FLOWS For the years ended August 31, 2000, 1999 and 1998 (In thousands)

See accompanying notes. F-7 ILM I LEASE CORPORATION Notes to Financial Statements 1. ORGANIZATION, RESTRUCTURING, AND NATURE OF OPERATIONS 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. ("ILM I"), formerly PaineWebber Independent 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. 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 which was assigned to the Company as of September 1, 1995. As discussed further in Note 6, the management agreement with AHC was terminated in July 1996. ILM I has elected to qualify and 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 (see Note 4). Because the Company, which is taxed as a so-called "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 was the operations 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 was accounted for as an operating lease in the Company's financial statements until August 15, 2000. In July 1996, following the 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 CSLC. As a result, the Management Agreement with Capital was considered a related party transaction through July 28, 1998 (see Note 3.). 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, subsequent to fiscal year end, on November 8, 2000, the Company's Board of Directors voted to pursue a plan of liquidation. As a result, 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. F-8 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 August 31, 2000 and 1999 and revenues and expenses for the years ended August 31, 2000, 1999 and 1998. Actual results could differ from the estimates and assumptions used. Certain amounts reported in 1999 have been reclassified to conform to the 2000 presentation. Furniture, fixtures and equipment was carried at the lower of cost, reduced by accumulated depreciation, or fair value in accordance with FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." Depreciation expense was provided on a straight-line basis using an estimated useful life of 3 to 5 years. In 1998, the Company changed the estimated useful lives of its assets due to the lease termination date of December 31, 1999, as such assets are not subject to repurchase by ILM Holding. For the fiscal year ended August 31, 1998, this increased depreciation expense by $136,000. Units at the Senior Housing Facilities were generally rented for terms of twelve months or less. The base rent charged varied depending on the unit size, with added fees collected for more than one occupant per unit and for assisted living services. Included in the amount of base rent charged were certain meals, housekeeping, medical and social services provided to the residents of each Senior Housing Facility. The Company rented the Senior Housing Facilities from ILM Holding pursuant to a multi-year operating lease. Rent expense was recognized on a straight-line basis over the term of the lease agreement. Deferred rent payable represents the difference between rent expense recognized on a straight-line basis and cash paid for rent pursuant to the terms of the lease agreement. The Company's policy is to expense all advertising costs as incurred. For the years ended August 31, 2000, 1999 and 1998, advertising expenses were $942,000, $931,000 and $856,000, respectively. The cash and cash equivalents, receivables, accounts payable and accrued liabilities appearing on the accompanying balance sheets represent financial instruments for purposes of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The carrying amount of these assets and liabilities approximates their fair value as of August 31, 2000 due to the short-term nature of these instruments. Income tax expense is provided for using the liability method as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company has provided a valuation allowance to recognize the effect that the lease termination date has on the estimated net realizable value of the deferred tax asset as explained more fully in Note 7 to the accompanying financial statements. At August 31, 2000 and 1999, a valuation allowance for deferred taxes of $533,000 and $235,000, respectively, is included in deferred taxes, net, on the accompanying balance sheets. For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less. F-9 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 3. RELATED PARTY TRANSACTIONS The Company retained Capital to be the property manager of the Senior Housing Facilities pursuant to a Management Agreement which commenced on July 29, 1996 and terminated on August 15, 2000. As discussed in Note 1, 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, 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 include 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, exceeds a specified base amount. Each August 31, beginning on August 31, 1997, the base amount was increased based on the percentage increase in the Consumer Price Index as well as 15% of Facility expansion costs. ILM I guaranteed the payment of all fees due to the terms of the Management Agreement. For the years ended August 31, 2000 and 1999, Capital earned property management fees from the Company of $955,000 and $1,008,000, respectively. On February 4, 1997, AHC filed a complaint in the Superior Court of the State of California against Capital, the new property manager; Lawrence A. Cohen, who, through July 28, 1998 was a Director of the Company and President, Chief Executive Officer and Director of ILM I, and others alleging that the defendants intentionally interfered with AHC's property management agreement (the "California litigation"). The complaint sought 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. At a Board 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 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. Legal fees paid by the Company and Lease II on behalf of Mr. Cohen totaled $229,000 as of August 31, 2000. The Company's Board also concluded that, subject to certain conditions, the Company or its affiliates should pay reasonable legal fees and expenses incurred by Capital in the California litigation. At August 31, 2000, the amount advanced to Capital by the Company and Lease II for Capital's California litigation costs totaled approximately $563,000. No amounts were advanced during fiscal year 2000. 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 expansion 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 years ended August 31, 2000 and 1999, Capital Senior Development, Inc. earned fees from the Company of $0 and $41,000, respectively, for managing pre-construction development activities for potential expansions of the Senior Housing Facilities. F-10 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 3. RELATED PARTY TRANSACTIONS (CONTINUED) Jeffry R. Dwyer, President, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2000 and 1999, Greenberg Traurig earned fees from the Company of $32,000 and $64,000, respectively. Accounts payable - Capital Senior Living Corporation at 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 August 31, 2000 includes $8,000 in unbilled legal fees payable to Greenberg Traurig, Counsel to the Company and a related party. Accounts Payable - related party at August 31, 1999 includes variable rent payable to ILM Holding of $305,000. 4. CAPITAL STOCK Prior to September 1, 1995, the Company was a wholly-owned subsidiary of ILM I. Pursuant to a reorganization and distribution agreement, ILM I 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 I 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 I Common Stock. No certificates or scrip representing fractional shares of the Company's Common Stock were issued to holders of ILM I Common Stock as part of the distribution. In lieu of receiving fractional shares, each holder of ILM I 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. F-11 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 5. THE FACILITIES LEASE AGREEMENT ILM Holding (the "Lessor"), a then majority-owned subsidiary of ILM I, 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. 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 had 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. F-12 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 5. THE FACILITIES LEASE AGREEMENT (CONTINUED) Pursuant to the Facilities Lease Agreement prior to its termination on August 15, 2000, 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 the Lessor, was responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Also, any fixed assets of the Company at a Senior Housing Facility would remain with the Senior Housing Facility at the termination of the lease. 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. For the fiscal years ended August 31, 2000 and 1999, variable rent expense was $1,183,000 and $1,164,000, 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. 6. LEGAL PROCEEDINGS AND CONTINGENCIES A management agreement between ILM Holding and AHC which covered the management of all eight Senior Housing Facilities was assigned to the Company effective September 1, 1995. On July 29, 1996, Lease I and ILM Holding (collectively for this Item 3, the "Companies") terminated a property management agreement with AHC covering the eight Senior Housing Facilities leased by Lease I from ILM Holding. The management agreement with AHC was terminated for "cause" pursuant to 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 Companies alleged, among other things, that AHC willfully performed actions specifically in violation of the management agreement and that such actions caused damages to the Companies. Due to the termination of the management 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 alleged that the management agreement was wrongfully terminated for cause and requested damages which included the payment of the 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 that the management agreement could have been terminated without cause, and recovery of attorneys' fees and expenses. F-13 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 6. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED) The aggregate amount of damages against all parties as requested in AHC's counterclaim exceeded $2,000,000. 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 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. On February 4, 1997, AHC filed a complaint in the Superior Court of the State of California against Capital, the new property manager; Lawrence A. Cohen, who, through July 28, 1998 was a Director of the Company and President, Chief Executive Officer and Director of ILM I, and others alleging that the defendants intentionally interfered with AHC's property management agreement (the "California litigation"). The complaint sought 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. At a Board 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 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. Legal fees paid by the Company and Lease II on behalf of Mr. Cohen totaled $229,000 as of August 31, 2000. The Company's Board also concluded that, subject to certain conditions, the Company or its affiliates should pay reasonable legal fees and expenses incurred by Capital in the California litigation. At August 31, 2000, the amount advanced to Capital by the Company and Lease II for Capital's California litigation costs totaled approximately $563,000. No amounts were advanced during fiscal year 2000. On August 18, 1998, the Company and its affiliates along with Capital and its affiliates entered into a Settlement Agreement with AHC. The Company and Lease II agreed to pay $1,625,000 and Capital and its affiliates agreed to pay $625,000 to AHC in settlement of all claims including those related to the Virginia litigation and the California litigation. The Company and its affiliates also entered into an agreement with Capital and its affiliates to mutually release each other from all claims that any such parties may have against each other, other than any claims under the property management agreements. On September 4, 1998, the full settlement amounts were paid to AHC and its affiliates with the Company paying $975,000 and Lease II paying $650,000. The Company has pending claims incurred in the normal course of business which, in the opinion of the Company's management, will not have a material effect on the financial statements of the Company. F-14 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 7. FEDERAL INCOME TAXES The Company is taxable as a so-called `C" corporation and, therefore, its income is subject to tax at the federal and state levels. The Company reports on a calendar year for tax purposes. Income taxes at the appropriate statutory rates have been provided for in the accompanying financial statements. Deferred income tax benefit reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred tax assets and liabilities as of August 31, 2000 and 1999, are comprised of the following amounts (in thousands):

The Company has provided a valuation allowance to consider the effects that the lease termination has on historical taxable income and the fact that cumulative tax over book depreciation and the net operating loss carryforward will not be recoverable against future taxable income as the lease is terminated. The net operating loss carryforward will expire in 2014. The components of income tax expense (benefit) for fiscal 2000, 1999 and 1998 are as follows (in thousands):

F-15 ILM I LEASE CORPORATION Notes to Financial Statements (continued) 7. FEDERAL INCOME TAXES (CONTINUED) The reconciliation of income tax computed for fiscal 2000, 1999 and 1998, at U.S. federal statutory rates to income tax expense (benefit) is as follows (in thousands):

F-16

ILM I LEASE CORP 10-K