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 May 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-18249
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
(Exact name of registrant as specified in its charter)
Virginia 04-3042283
(State of organization) (I.R.S.Employer
Identification No.)
1285 Avenue of the Americas, New York, New York 10019
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (212) 713-4264
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Shares of Common Stock None
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF COMMON STOCK
(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 May 31, 1996: 7,520,100. The
aggregate sales price of the shares sold was $75,201,000. This does not
reflect market value. There is no current market for these shares.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
CONSOLIDATED BALANCE SHEETS
May 31, 1996 and August 31, 1995
(Unaudited)
(In thousands)
ASSETS
May 31 August 31
---------- ----------
Operating investment properties, at cost:
Land $ 3,352 $ 3,352
Building and improvements 40,285 40,128
Furniture, fixtures and equipment 5,151 4,948
---------- ----------
48,788 48,428
Less: accumulated depreciation (10,701) (9,532)
---------- ----------
38,087 38,896
Cash and cash equivalents 2,961 5,006
Interest and other receivables 142 187
Prepaid expenses and other assets 185 122
---------- ----------
$ 41,375 $ 44,211
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 51 $ 850
Accounts payable - affiliates 22 144
Shareholders' equity 41,302 43,217
---------- ----------
$ 41,375 $ 44,211
========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended May 31, 1996 and 1995 (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
May 31, May 31,
--------------------- -------------------
1995 1995
1996 (As restated) 1996 (As restated)
---- ------------ ---- -----------
Revenues:
Rental income $ 1,591 $ 4,121 $ 4,614 $12,137
Interest income 33 61 111 133
-------- -------- -------- -------
1,624 4,182 4,725 12,270
Expenses:
Property operating expenses - 2,453 - 7,160
Depreciation expense 374 385 1,169 1,156
Management and advisory fees 22 44 66 128
General and administrative 225 65 739 330
Directors' compensation 6 6 18 18
-------- -------- -------- -------
627 2,953 1,992 8,792
-------- -------- -------- -------
Net income $ 997 $ 1,229 $ 2,733 $ 3,478
======== ======== ======== =======
Earnings per share of
common stock $0.13 $0.16 $0.36 $0.46
===== ===== ===== =====
Cash dividends paid
per share of common stock $0.18 $0.15 $0.53 $0.40
===== ===== ===== =====
The above earnings and cash dividends paid per share of common stock are
based upon the 7,520,100 shares outstanding during each period.
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended May 31, 1996 and 1995 (Unaudited)
(In thousands)
Common Stock Additional
$.01 Par Value Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ----------- -----
Shareholders' equity
at August 31, 1994 7,520 $75 $65,711 $(22,337) $43,449
Cash dividends paid - - - (3,008) (3,008)
Net income - - - 3,478 3,478
------ -- ------- -------- -------
Shareholders' equity
at May 31, 1995 7,520 $75 $65,711 $(21,867) $43,919
===== === ======= ======== =======
Shareholders' equity
at August 31, 1995 7,520 $75 $65,711 $(22,569) $43,217
Cash dividends paid - - - (3,948) (3,948)
Distribution of
stock in ILM I
Lease Corporation - - - (700) (700)
Net income - - - 2,733 2,733
------ -- ------- -------- -------
Shareholders' equity
at May 31, 1996 7,520 $75 $65,711 $(24,484) $41,302
===== === ======= ======== =======
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995
1996 (As restated)
---- ------------
Cash flows from operating activities:
Net income $ 2,733 $ 3,478
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 1,169 1,156
Changes in assets and liabilities:
Interest and other receivables 45 3
Prepaid expenses (63) (13)
Accounts payable - affiliates (122) (2)
Accounts payable and accrued expenses (799) 175
-------- --------
Total adjustments 230 1,319
-------- --------
Net cash provided by operating activities 2,963 4,797
-------- --------
Cash flows from investing activities:
Funding of initial working capital to ILM I
Lease Corporation (700) -
Additions to operating investment properties (360) (648)
Net proceeds from settlement of claims with Angeles
Corporation and affiliates - 1,423
-------- --------
Net cash provided by (used in) investing
activities (1,060) 775
-------- --------
Cash flows from financing activities:
Cash dividends paid to shareholders (3,948) (3,008)
--------- ---------
Net (decrease) increase in cash and cash equivalents (2,045) 2,564
Cash and cash equivalents, beginning of period 5,006 2,297
--------- ---------
Cash and cash equivalents, end of period $ 2,961 $ 4,861
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
The accompanying consolidated financial statements, footnotes and
discussions should be read in conjunction with the consolidated financial
statements and footnotes contained in the Company's Annual Report for the
year ended August 31, 1995. In the opinion of management, the accompanying
consolidated financial statements, which have not been audited, reflect all
adjustments necessary to present fairly the results for the interim period.
All of the accounting adjustments reflected in the accompanying interim
consolidated financial statements are of a normal recurring nature.
As discussed in the Company's Annual Report, the Company was formed for
the purpose of investing in a portfolio of participating mortgage loans
secured by rental housing complexes for independent senior citizens ("Senior
Housing Facilities"). The Company invested the net proceeds of the initial
public offering in eight participating mortgage loans secured by Senior
Housing Facilities located in seven different states. All loans made by the
Company were originally made to Angeles Housing Concepts, Inc. ("AHC") for
its use in developing, acquiring and operating the eight Senior Housing
Facilities. The Company entered into an Exclusivity Agreement with AHC and
its parent company, Angeles Corporation ("Angeles") which required AHC to
provide the Company with certain specific opportunities to finance Senior
Housing Facilities, and it set forth the terms and conditions of the loans
which were made. In the aggregate, the properties securing loans from the
Company did not generate sufficient cash flow to cover the debt service
payments owed to the Company under the original terms of the Exclusivity
Agreement, which called for minimum base and additional interest payments
equal to 13% per annum. To the extent that the properties did not generate
sufficient cash flow to make the full payments due under the loan documents,
the shortfall was funded by AHC through December 1992. The source of cash
for these fundings was from pre-established deficit reserve accounts and
contributions from Angeles. During the quarter ended February 28, 1993,
Angeles announced that it was experiencing liquidity problems that had
resulted in the inability to meet its obligations. Subsequently, AHC
defaulted on the regularly scheduled mortgage loan payments due to the
Company on March 1, 1993. Subsequent to the payment defaults, on May 3,
1993, Angeles filed for reorganization under a Chapter 11 Federal Bankruptcy
petition filed in the state of California.
In June 1993, a non-binding settlement agreement between the Company, AHC
and Angeles was reached which involved the transfer of title to ownership of
the properties from AHC to the Company or its designated affiliates. On
April 27, 1994, ownership of each of the Facilities securing the loans from
the Company was transferred (collectively, "the Transfers") to newly-created
special purpose corporations affiliated with the Company ("the Property
Companies"). All of the capital stock of each Property Company was held by
ILM Holding, Inc. ("ILM Holding"), a Virginia corporation. The capital stock
of ILM Holding is owned by the Company and PWP Holding, Inc. ("PWP
Holding"), a wholly owned subsidiary of PaineWebber Properties Incorporated,
which is an affiliate of the Advisor. The Company holds substantially all of
the economic ownership in ILM Holding, while PWP Holding holds voting
control. ILM Holding issued 100 shares of Series A Preferred Stock to the
Company in return for a capital contribution in the amount of $693,000 and
issued 10,000 shares of Common Stock to PWP Holding in return for a capital
contribution in the amount of $7,000. The Transfers had an effective date of
April 1, 1994. The Transfers were made pursuant to a final Settlement
Agreement entered into on February 17, 1994 ("the Settlement Agreement")
between the Company, AHC and Angeles, and previously approved by the
bankruptcy court handling the Angeles bankruptcy proceedings. Concurrent
with the Transfers, the mortgage loans from the Company, which were assumed
by the Property Companies, were modified (see Note 2). In addition to
providing for the transfer of title to the properties to the Company, the
Settlement Agreement called for AHC to be retained in a property management
capacity under a contract covering all of the Senior Housing Facilities (see
Note 3).
<PAGE>
Subsequent to the effective date of the Settlement Agreement with AHC,
management investigated and evaluated the available options for structuring
the ownership of the properties in order to maximize the potential returns
to the existing shareholders while maintaining the Company's qualification
as a REIT under the Internal Revenue Code. After extensive review, the Board
of Directors determined that it would be in the best interests of the
shareholders for the Company to retain REIT status and master lease the
properties to a shareholder-owned operating company. Despite the additional
costs associated with the master leases of the properties, the Directors
believed that this alternative would maximize potential shareholder returns
and allow the greatest flexibility to provide future liquidity to
shareholders.
In connection with the Company's restructuring plans, in August 1995 each
of the Property Companies merged into ILM Holding. As a result, ownership of
the Senior Housing Facilities is now held by ILM Holding and the Property
Companies no longer exist as separate legal entities. In addition, on
September 12, 1994, the Company formed a new subsidiary, ILM I Lease
Corporation, for the purpose of operating the Senior Housing Facilities
under the terms of a master lease agreement. ILM I Lease Corporation, which
is taxable as a regular C Corporation and not as a REIT, was a wholly owned
subsidiary of the Company as of August 31, 1995. On September 1, 1995, the
Company distributed all of the shares of capital stock of ILM I Lease
Corporation to the holders of record of the Company's common stock. Prior to
the distribution on September 1, 1995, the Company capitalized ILM I Lease
Corporation with $700,000 from its existing cash reserves, which was an
amount estimated to provide ILM I Lease Corporation with necessary working
capital.
In prior years, the Company had accounted for its investments in mortgage
loans as investments in acquisition and construction loans under the equity
method because the loans met certain accounting criteria which require that
participating mortgage loans with certain characteristics be accounted for
as joint ventures. Such accounting criteria are meant to apply to lending
arrangements which have essentially the same risks and potential rewards for
the lender as would exist in a joint venture partnership. The final phase of
the Company's restructuring plans involves either the liquidation of ILM
Holding and the transfer of ownership of the Senior Housing Facilities to
the Company or its wholly-owned subsidiary or the conversion of ILM Holding
to a REIT for tax purposes. As a result of these plans, which are expected
to be finalized during fiscal 1996, the financial position, results of
operations and cash flows of ILM Holding are presented on a consolidated
basis with the Company as of and for the nine months ended May 31, 1996. The
prior year financial statements have been restated to present the combined
Facilities on a consolidated basis in order for the statements to be
comparable to the current year presentation. Such restatement does not
affect the net income or net shareholders' equity amounts previously
reported. All material intercompany balances and transactions have been
eliminated in consolidation. The Company's policy had been to record its
equity in the earnings or losses of the properties based on financial
information of the properties which was two months in arrears to that of the
Company. As a result of the restructuring of the property ownership
discussed above, the Company eliminated this reporting lag as of the end of
fiscal 1995.
<PAGE>
2. Operating Investment Properties
The accompanying financial statements include the Company's investments
in eight Senior Housing Facilities. The name, location and size of the
properties and the date that the Company made its initial investment in such
assets are as set forth below:
Rentable Date of
Name Location Units Investment (1)
---- -------- ----- --------------
Independence Village
of East Lansing East Lansing, MI 159 6/29/89
Independence Village
of Winston-Salem Winston-Salem, NC 156 6/29/89
Independence Village
of Raleigh Raleigh, NC 163 4/29/91
Independence Village
of Peoria Peoria, IL 164 11/30/90
Crown Pointe Apartments Omaha, NE 133 2/14/90
Sedgwick Plaza Apartments Wichita, KS 150 2/14/90
West Shores Hot Springs, AR 134 12/14/90
Villa Santa Barbara (2) Santa Barbara, CA 123 7/13/92
(1)Represents the date of the Company's original mortgage loan to Angeles
Housing Concepts, Inc. (see Note 1).
(2)The acquisition of the California Facility was financed jointly by the
Company and an affiliated entity, PaineWebber Independent Living
Mortgage Inc. II ("ILM2"). All amounts generated from Villa Santa
Barbara are equitably apportioned between the Company, together with its
consolidated affiliate, and ILM2, together with its consolidated
affiliate, generally 25% and 75%, respectively.
As discussed in Note 1, effective April 1, 1994 each Property Company
acquired the respective operating property subject to, and assumed the
obligations under the mortgage loan payable to the Company, pursuant to the
Settlement Agreement described in Note 1. The principal balance on each loan
was modified to reflect the estimated fair value of the related operating
property as of the date of the Transfers. The modified loans require
interest-only payments on a monthly basis at a rate of 9.5% from April 1,
1994 through December 1, 1994, 11% for the period from January 1 through
December 31, 1995, 12.5% for the period January 1 through December 31, 1996,
13.5% for the period January 1 through December 31, 1997, 14% for the period
January 1 through December 31, 1998 and 14.5% for the period January 1, 1999
through maturity. In August 1995, each of the Property Companies was merged
into ILM Holding. As a result, ownership of the Senior Housing Facilities,
as well as the obligation under the loans, is now held by ILM Holding and
the Property Companies no longer exist as separate legal entities. Since ILM
Holding is consolidated with the Company in the accompanying financial
statements, the mortgage loans and related interest income and expense have
been eliminated in consolidation.
As discussed in Note 1, effective September 1, 1995, the properties are
subject to a master lease with a newly formed company, ILM I Lease
Corporation. The master lease agreement is initially between ILM Holding, as
owner of the properties and Lessor, and ILM I Lease Corporation, as Lessee.
The master lease is a "triple-net" lease with an original fixed term
expiring December 31, 1999. The Lessor has the right to terminate the master
lease as to any property sold by the Lessor as of the date of such sale.
During the initial term of the master lease, ILM I Lease Corporation is
obligated to pay annual base rent for the use of all of the Facilities in
the aggregate amount of $5,886,000 for calendar year 1995 (prorated based on
the commencement date of the lease) and $6,364,800 for calendar year 1996
and each subsequent year. Beginning in fiscal 1997, and for each fiscal year
thereafter, ILM I Lease Corporation will also be obligated to pay variable
rent for each Facility. Such variable rent will be equal to 40% of the
excess, if any, of the aggregate total revenues for the Facilities for
fiscal 1997 or such subsequent fiscal year over $16,996,000. In addition, as
the Lessee, ILM I Lease Corporation is responsible for paying all
governmental taxes and assessments, utility charges, and insurance premiums,
as well as the costs of all required maintenance and non-structural repairs
to the Facilities. The Lessor, as the owner of the Facilities, is
responsible for all capital improvements and structural repairs to the
Facilities.
For the three and nine months ended May 31, 1996, rental income on the
accompanying income statement reflects the rental payments due under the
terms of the master lease agreement. For the same periods in the prior year,
rental income reflects the rental payments due under the terms of the
individual tenant leases. Property operating expenses in the prior periods
reflect the day-to-day costs of operating the Facilities, including the
management fees payable to AHC, in addition to the real estate taxes
associated with the ownership of the operating properties. As noted above,
under the terms of the master lease all such costs are now the
responsibility of the Lessee.
<PAGE>
Combined summarized operating results of the Company's operating
investment properties reflecting the rental income earned on individual
tenant leases and the property operating expenses as reported by ILM I Lease
Corporation in its quarterly filing with the United States Securities and
Exchange Commission are as follows (in thousands):
Three Nine
Months Ended Months Ended
5/31/96 5/31/96
------- ------
Rental income $ 4,331 $12,871
Expenses:
Property management fees 239 709
Property operating expenses 1,919 5,764
Real estate taxes and insurance 264 772
------- -------
2,422 7,245
------- -------
$ 1,909 $ 5,626
======= =======
3. Management Agreement
Management of the Facilities has been provided by AHC from, and in
certain cases prior to, the date that the original mortgage loans were made
by the Company (see Note 1). In connection with the Settlement Agreement
described in Note 1, AHC was retained in a property management capacity
under a contract with an original expiration date of December 31, 1994. The
contract is automatically renewable for successive one-year periods through
December 31, 1999, subject to certain limitations described further below.
The terms of the management contract provide that AHC will receive a base
management fee equal to 5.5% of Gross Operating Revenues of the Senior
Housing Facilities, as defined. In addition, under the original terms of the
contract, AHC was eligible to earn additional compensation through a 25%
participation in excess cash flow or sale or refinancing proceeds above
certain specified levels. The thresholds at which AHC would begin to
participate in excess cash flow or sale or refinancing proceeds were set at
levels which provided that the Company would receive all amounts to which it
was originally entitled under the terms of the Exclusivity Agreement on a
cumulative basis before such participation began. During the first quarter
of fiscal 1996, the Company reached an agreement with AHC regarding certain
modifications to the management agreement. In return for making the contract
non-cancellable, except for cause, for a one-year period, AHC agreed to
waive its rights to any additional compensation to which it might be
entitled through the participation interest described above. In addition,
the parties agreed to fix the termination fee due to AHC if the agreement is
terminated without cause prior to December 31, 1999. Prior to such
agreement, the termination fee was calculated based on a percentage of Gross
Operating Revenues of the Senior Housing Facilities for a specified number
of months which varied depending on the date of termination and the
achievement of certain minimum net operating income levels. Subsequent to
this amendment, the management agreement may be terminated without cause
upon 30 days' written notice subsequent to September 15, 1996. The contract
may be terminated immediately for cause, which includes failure to meet
certain minimum occupancy and rental rate thresholds. If the agreement is
terminated without cause prior to December 31, 1999, AHC would be due a
termination fee of $1,250,000. As explained in Note 2, effective September
1, 1995, the obligations to pay AHC under the terms of the management
agreement were transferred to ILM I Lease Corporation. However, the Company
has guaranteed the payment of the termination fee described above.
4. Related Party Transactions
The advisors to the Company and its consolidated affiliate earned
management and advisory fees of $66,000 and $128,000 for the nine months
ended May 31, 1996 and 1995, respectively. Accounts payable - affiliates at
both May 31, 1996 and August 31, 1995 includes management fees of $22,000
owed to the Advisor. Accounts payable - affiliates at August 31, 1995 also
includes $4,000 of out-of-pocket expense reimbursements payable to PWPI and
$84,000 payable to an affiliated company, PaineWebber Independent Living
Mortgage Inc. II (ILM2) for advances made by ILM2 on behalf of the Company to
the Villa Santa Barbara Senior Housing Facility (see Note 2).
Included in general and administrative expenses for the nine months ended
May 31, 1996 and 1995 is $115,000 and $123,000, respectively, representing
reimbursements to an affiliate of the Advisor for providing certain
financial, accounting and investor communication services to the Company.
Also included in general and administrative expenses for the nine months
ended May 31, 1996 and 1995 is $8,000 and $4,000, respectively, representing
fees earned by Mitchell Hutchins Institutional Investors, Inc. for managing
the Company's cash assets.
5. Subsequent Events
On June 14, 1996, the Company's Board of Directors declared a quarterly
dividend for the quarter ended May 31, 1996. On July 15, 1996, a dividend of
$0.175 per share of common stock, totalling $1,316,000, will be paid to
shareholders of record as of June 28, 1996.
6. Contingencies
The Company is involved in certain legal actions. At the present time,
management is unable to estimate the impact, if any, that these matters may
have on the Company's financial statements, taken as a whole.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As described further in the Company's Annual Report for fiscal 1995,
effective September 1, 1995 the Company implemented a plan which involved master
leasing the Senior Housing Facilities to a shareholder-owned operating company.
As discussed further in the Annual Report, the Board of Directors believed that
such a master lease structure was the best alternative to preserve the Company's
REIT status, maximize potential shareholder returns and allow for the greatest
flexibility to provide future liquidity to shareholders.
In connection with the Company's restructuring plans, in September 1994
the Company formed a new corporation, ILM I Lease Corporation, for the purpose
of operating the Senior Housing Facilities under the terms of a master lease
agreement. As of August 31, 1995, ILM I Lease Corporation, which is taxable as a
regular C corporation and not as a REIT, was a wholly-owned subsidiary of the
Company. On September 1, 1995, after the Company received the required
regulatory approval, it distributed all of the shares of capital stock of ILM I
Lease Corporation to the holders of record of the Company's common stock. One
share of common stock of ILM I Lease Corporation was issued for each full share
of the Company's common stock held. Holders of the Company's common stock were
not required to pay any cash or other consideration or to exchange their common
stock of the Company for the common stock of ILM I Lease Corporation. The
distribution of the capital stock of ILM I Lease Corporation did not affect the
number of shares of the Company's common stock outstanding. Prior to the
distribution, the Company capitalized ILM I Lease Corporation with $700,000 from
its existing cash reserves, which is an amount estimated to provide ILM I Lease
Corporation with necessary working capital. Prior to the distribution of the ILM
I Lease Corporation stock, the Company's shareholders received an information
statement fully describing ILM I Lease Corporation and the distribution of its
capital stock.
The master lease agreement is initially between the Company's consolidated
affiliate, ILM Holding, Inc., as owner of the properties and Lessor, and ILM I
Lease Corporation as Lessee. The master lease is a "triple-net" lease with an
original fixed term expiring December 31, 1999. The Lessor has the right to
terminate the master lease as to any property sold by the Lessor as of the date
of such sale. During the initial term of the master lease, ILM I Lease
Corporation will be obligated to pay annual base rent for the use of all of the
Facilities in monthly installments of $490,500 for calendar year 1995 and
monthly installments of $530,400 for calendar year 1996 and each subsequent
year. Beginning in fiscal 1997, and for each fiscal year thereafter, ILM I Lease
Corporation will also be obligated to pay variable rent to the Lessor for each
Facility. Such variable rent will be equal to 40% of the excess, if any, of the
aggregate total revenues for the Facilities for fiscal 1997 or such subsequent
fiscal year over $16,996,000. In addition, as the Lessee, ILM I Lease
Corporation is responsible for paying all governmental taxes and assessments,
utility charges, and insurance premiums, as well as the costs of all required
maintenance and non-structural repairs to the Facilities. The Lessor, as the
owner of the Facilities, is responsible for all capital improvements and
structural repairs to the Facilities.
The Company currently plans to hold its investments in the Senior Housing
Facilities for long-term investment purposes. At the present time, the outlook
for the senior housing industry is excellent. Increasing numbers of seniors and
the high incidence of seniors requiring assistance with daily living have
substantially increased the demand for senior housing and assisted-living
services. Management expects that this trend will continue for the foreseeable
future. The resulting potential for attractive returns appears to be causing
real estate buyers to seek acquisition opportunities for a limited pool of
available properties which has caused market values for existing properties to
increase. Demand would appear to be particularly high for Senior Housing
Facilities with assisted living units, which the Company has at certain of its
properties. At some point in this typical real estate market cycle, expected
returns become high enough to justify the construction of new facilities which
will result in the addition of supply to the market. At such time, values could
be expected to plateau and possibly decline. With the current expected return
characteristics and the continued availability of favorable financing terms,
some market observers are predicting a significant increase in development
activity in the senior housing segment over the course of the next 5-to-10
years. In certain of the Company's markets, capital investment in the
construction of new competing senior housing properties has increased noticeable
in recent months. Management will continue to monitor market dynamics to
determine the optimal time to sell the Company's assets. Management continues to
analyze the potential impact on overall shareholder returns of leveraging the
portfolio of properties with mortgage debt and distributing the financing
proceeds to the shareholders in the near term. Management expects to complete
its analysis and formalize its strategic plans for the Company during 1996.
As a result of assuming ownership of the properties through ILM Holding, a
regular C corporation for tax purposes, the Company, as a REIT, has a possible
future tax liability which would be payable upon the ultimate sale of the
properties (the "built-in gain tax"). The amount of such tax would be calculated
based on the lesser of the total net gain realized from the sale transaction or
the portion of the net gain realized upon a final sale which is attributable to
the period during which the properties were held by the C corporation. The REIT
would most likely not incur a built-in gain tax if it were to hold the
properties for a period of at least 10 years from the date of transfer from the
C corporation. However, since the end of the Company's original anticipated
holding period is only 4 years away, the Company is not expected to hold the
properties for an additional 10 years. The Board of Directors may defer the
Company's scheduled liquidation date, if in the opinion of a majority of the
Directors, the disposition of the Company's assets at such time would result in
a material under-realization of the value of such assets; provided, however,
that no such deferral may extend beyond December 31, 2004. Based on management's
current estimate of the increase in the values of the properties which has
occurred since April 1994, as supported by independent appraisals, the Company
would expect to incur a sizable tax if the properties were sold in the near
term. Based on these current estimated market values of the operating investment
properties, a sale at such values prior to the end of the 10-year holding period
could result in a built-in gain tax of as much as $2.9 million. The final phase
of the Company's restructuring plans involves either the liquidation of ILM
Holding and the transfer of ownership of the Senior Housing Facilities to the
Company or its wholly-owned subsidiary or the conversion of ILM Holding to a
REIT for tax purposes. Any future appreciation in the value of the assets
subsequent to the transfer of ownership from ILM Holding to the Company or the
conversion of ILM Holding to a REIT would not be subject to the built-in gain
tax.
The eight properties in which the Company has invested averaged 92%
occupancy for the quarter ended May 31, 1996. As previously reported, a property
renovation and assisted-living conversion program has been in progress at Villa
Santa Barbara for the past 24 months. Phase one of the renovations at the Santa
Barbara Facility, which was completed during fiscal 1995, included renovation of
the lobby, dining room, library, activities room, television and game room and
the laundry rooms. Phase two of the renovation program, which was substantially
completed during the first quarter of fiscal 1996, involved interior unit
improvements, hallway upgrades and the conversion of existing studio units to
assisted living units. The total cost of the renovation program was
approximately $1.2 million, which has been funded 25% by the Company and 75% by
PaineWebber Independent Living Mortgage Inc. II ("ILM2") from funds previously
reserved for such improvements. Leasing gains at Santa Barbara have been slowed
by delays in completing the capital improvements and in obtaining the required
regulatory licensing to begin leasing the new assisted living units. During the
quarter ended May 31, 1996, the Company received the required assisted living
licenses. Leasing of the 38 new assisted living units is now underway. Overall
occupancy of Villa Santa Barbara had increased to 79% as of the end of the third
quarter.
Management of the Facilities has been provided by AHC from, and in certain
cases prior to, the date that the original mortgage loans were made by the
Company. In connection with the Settlement Agreement described in Note 1 to the
accompanying financial statements, AHC was retained in a property management
capacity under a contract with an original expiration date of December 31, 1994.
The contract is automatically renewable for successive one-year periods through
December 31, 1999, subject to certain limitations. The terms of the management
contract provide that AHC will receive a base management fee equal to 5.5% of
Gross Operating Revenues of the Senior Housing Facilities, as defined. In
addition, under the original terms of the contract, AHC was eligible to earn
additional compensation through a 25% participation in excess cash flow or sale
or refinancing proceeds above certain specified levels. The thresholds at which
AHC would begin to participate in excess cash flow or sale or refinancing
proceeds were set at levels which provided that the Company would receive all
amounts to which it was originally entitled under the terms of the Exclusivity
Agreement on a cumulative basis before such participation began. During the
first quarter of 1996, the Company reached an agreement with AHC regarding
certain modifications to the management agreement. In return for making the
contract non-cancellable, except for cause, for a one-year period, AHC agreed to
waive its rights to any additional compensation to which it might be entitled
through the participation interest described above. In addition, the parties
agreed to fix the termination fee due to AHC if the agreement is terminated
without cause prior to December 31, 1999 at a flat amount. Prior to such
agreement, the termination fee was calculated based on a percentage of Gross
Operating Revenues of the Senior Housing Facilities for a specified number of
months which varied depending on the date of termination and the achievement of
certain minimum net operating income levels. Subsequent to this amendment, the
management agreement may be terminated without cause upon 30 days' written
notice subsequent to September 15, 1996. The contract may be terminated
immediately for cause, which includes failure to meet certain minimum occupancy
and rental rate thresholds. If the agreement is terminated without cause prior
to December 31, 1999, AHC would be due a termination fee of $1,250,000.
Effective September 1, 1995, the obligations to pay AHC under the terms of the
management agreement were transferred to ILM I Lease Corporation. However, the
Company has guaranteed the payment of the termination fee described above.
At May 31, 1996, the Company and its consolidated affiliate had cash and
cash equivalents of $2,961,000. Such amounts will be used for the working
capital requirements of the Company, along with the possible investment in the
properties owned by the Company's consolidated affiliate for certain capital
improvements and for dividends to the Shareholders. Although the Company,
through its consolidated affiliate, has taken title to the operating properties,
its liquidity needs are not expected to be significantly different in the near
term. The Company had already set aside funds to pay for initial identified
capital improvement programs at certain of the Senior Housing Facilities. Future
capital improvements could be financed from operations or through borrowings,
depending on the magnitude of the improvements, the availability of financing
and the Company's incremental borrowing rate. The source of future liquidity and
dividends to the Shareholders is expected to be through master lease payments
from ILM I Lease Corporation, interest income earned on invested cash reserves
and proceeds from the future sales of the underlying operating investment
properties. Such sources of liquidity are expected to be adequate to meet the
Company's operating requirements on both a short-term and long-term basis. The
Company generally will be obligated to distribute annually at least 95% of its
taxable income to its Shareholders in order to continue to qualify as a REIT
under the Internal Revenue Code.
Results of Operations
Three Months Ended May 31, 1996
Net income decreased by $232,000 for the three months ended May 31, 1996,
when compared to the same period in the prior year. One of the reasons for this
decrease in net income for the third quarter of fiscal 1996 is the restructuring
of the Company, as discussed above and in the notes to the accompanying
financial statements. As a result of the restructuring, the Company now receives
master lease rental income from ILM I Lease Corporation rather than the revenues
from the individual tenants of the Senior Housing Facilities. In addition, under
the terms of the master lease, all property operating expenses are now the
responsibility of the Lessee. The master lease rental income earned by the
Company during the current three-month period was $77,000 less than the excess
of rental income earned from the Senior Housing Facilities over property
operating expenses during the same period in the prior year. In addition, net
income decreased as a result of an increase in general and administrative
expenses of $160,000. General and administrative expenses increased mainly due
to an increase in professional fees. Professional fees increased primarily as a
result of legal expenses incurred in connection with the restructuring of the
Company, as discussed above.
Nine Months Ended May 31, 1996
Net income decreased by $745,000 for the nine months ended May 31, 1996,
when compared to the same period in the prior year. The new master lease
structure accounted for a substantial portion of this decrease in net income for
the current nine-month period. The master lease rental income earned by the
Company during the nine-month period ended May 31, 1996 was $363,000 less than
the excess of rental income earned from the Senior Housing Facilities over
property operating expenses during the same period in the prior year. In
addition, net income decreased as a result of an increase in general and
administrative expenses of $409,000. General and administrative expenses
increased mainly due to an increase in professional fees. Professional fees
increased primarily as a result of legal expenses incurred in connection with
the restructuring of the Company, as discussed above.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously disclosed, the Company's management was named as a defendant
in a class action lawsuit against PaineWebber Incorporated ("PaineWebber") and a
number of its affiliates relating to PaineWebber's sale of 70 direct investment
offerings, including the offering of interests in the various limited
partnership investments and REIT stocks, including those offered by the Company.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and a plan of allocation which the parties expect to submit
to the court for its consideration and approval within the next several months.
Until a definitive settlement and plan of allocation is approved by the court,
there can be no assurance what, if any, payment or non-monetary benefits will be
made available to shareholders in Independent Living Mortgage Fund, Inc.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership investments and REIT
stocks, including those offered by the Company. The complaint alleges, among
other things, that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs
by selling or promoting limited partnership and REIT investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages. The
eventual outcome of this litigation and the potential impact, if any, on the
Company's shareholders cannot be determined at the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests and REIT stocks,
including those offered by the Company. The complaint is substantially similar
to the complaint in the Abbate action described above, and seeks compensatory
damages of $3.4 million plus punitive damages.
In July 1996, approximately 15 plaintiffs filed an action entitled
Barstad v. PaineWebber Inc. in Maricopa County, Arizona Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests and REIT stocks,
including those offered by the Company. The complaint is substantially similar
to the complaint in the Abbate action described above, and seeks compensatory
damages of $752,000 plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the General Partners cannot estimate the impact, if any, of
these indemnification claims on the Company's financial statements, taken as a
whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
SIGNATURES
Pursuant to the requirements 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: PAINEWEBBER INDEPENDENT LIVING
MORTGAGE FUND, INC.
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President, Chief
Financial Officer and Treasurer
Dated: July 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended May 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 2,961
<SECURITIES> 0
<RECEIVABLES> 142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 327
<PP&E> 48,788
<DEPRECIATION> 10,701
<TOTAL-ASSETS> 41,375
<CURRENT-LIABILITIES> 73
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 41,302
<TOTAL-LIABILITY-AND-EQUITY> 41,375
<SALES> 0
<TOTAL-REVENUES> 4,725
<CGS> 0
<TOTAL-COSTS> 1,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,733
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,733
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
