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, 1997
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 (800) 225-1174
--------------
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, 1997: 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, 1997 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
May 31 August 31
------ ---------
Operating investment properties, at cost:
Land $ 3,352 $ 3,352
Building and improvements 40,326 40,310
Furniture, fixtures and equipment 4,948 4,948
--------- ---------
48,626 48,610
Less: accumulated depreciation (12,187) (11,048)
--------- ---------
36,439 37,562
Cash and cash equivalents 3,610 3,010
Interest and other receivables 247 399
Accounts receivable - related party 301 348
Prepaid expenses and other assets 63 11
Deferred rent receivable 95 123
--------- ---------
$ 40,755 $ 41,453
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 253 $ 63
Accounts payable - affiliates 23 22
Accrued termination fee payable 600 -
Minority interest in consolidated subsidiary 111 -
Shareholders' equity 39,768 41,368
--------- ---------
$ 40,755 $ 41,453
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended May 31, 1997 and 1996 (Unaudited)
(In thousands, except per Share amounts)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental income $1,710 $1,582 $4,945 $4,746
Interest income 42 33 117 111
------ ------ ------ ------
1,752 1,615 5,062 4,857
Expenses:
Depreciation expense 380 379 1,139 1,138
Management fees 22 22 66 66
Termination fee 600 - 600 -
General and administrative 99 89 326 310
Professional fees 182 136 338 304
Directors' compensation 33 6 57 18
------ ------ ------ ------
1,316 632 2,526 1,836
------ ------ ------ ------
Net income $ 436 $ 983 $2,536 $3,021
====== ====== ====== ======
Earnings per share of
common stock $ 0.06 $ 0.13 $ 0.34 $ 0.40
====== ====== ====== ======
Cash dividends paid per share of
common stock $ 0.19 $ 0.18 $ 0.55 $ 0.53
====== ====== ====== ======
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, 1997 and 1996 (Unaudited)
(In thousands)
Common Stock Additional
$.01 Par Value Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
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 - - - 3,021 3,021
----- --- ------- -------- -------
Shareholders' equity
at May 31, 1996 7,520 $75 $65,711 $(24,196) $41,590
===== === ======= ======== =======
Shareholders' equity
at August 31, 1996 7,520 $75 $65,711 $(24,418) $41,368
Cash dividends paid - - - (4,136) (4,136)
Net income - - - 2,536 2,536
----- --- ------- -------- -------
Shareholders' equity
at May 31, 1997 7,520 $75 $65,711 $(26,018) $39,768
===== === ======= ======== =======
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 2,536 $ 3,021
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 1,139 1,138
Charitable contribution of preferred stock
in ILM Holding 111 -
Changes in assets and liabilities:
Interest and other receivables 152 45
Accounts receivable - related party 47 -
Prepaid expenses (52) (63)
Deferred rent receivable 28 (132)
Accounts payable and accrued expenses 190 (924)
Accounts payable - affiliates 1 (122)
Accrued termination fee payable 600 -
-------- -------
Total adjustments 2,216 (58)
-------- -------
Net cash provided by operating activities 4,752 2,963
Cash flows from investing activities:
Additions to operating investment properties (16) (360)
Funding of initial working capital to ILM I
Lease Corporation - (700)
-------- -------
Net cash used in investing activities (16) (1,060)
Cash flows from financing activities:
Cash dividends paid to shareholders (4,136) (3,948)
-------- -------
Net increase (decrease) in cash and cash equivalents 600 (2,045)
Cash and cash equivalents, beginning of period 3,010 5,006
-------- -------
Cash and cash equivalents, end of period $ 3,610 $ 2,961
======== =======
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
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, 1996. 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.
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting in accordance with generally accepted
accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of May 31, 1997 and
August 31, 1996 and revenues and expenses for each of the three and nine
month periods ended May 31, 1997 and 1996. Actual results could differ from
the estimates and assumptions used.
As discussed in the Company's Annual Report, the accompanying financial
statements reflect the consolidated financial position, results of
operations and cash flows of the Company and ILM Holding, Inc. ("ILM
Holding"). ILM Holding holds title to the eight Senior Housing Facilities
which comprise the balance of operating investment properties on the
accompanying consolidated balance sheets, subject to certain mortgage loans
payable to the Company. Such mortgage loans and the related interest
expense are eliminated in consolidation. The capital stock of ILM Holding
was originally owned by the Company and PWP Holding, Inc. ("PWP Holding"),
a wholly owned subsidiary of PaineWebber Properties Incorporated ("PWPI").
ILM Holding had issued 100 shares of Series A Preferred Stock to the
Company in return for a capital contribution in the amount of $693,000 and
had issued 10,000 shares of Common Stock to PWP Holding in return for a
capital contribution in the amount of $7,000. The common stock represented
approximately 99 percent of the voting power and 1 percent of the economic
interest in ILM Holding, while the preferred stock represented
approximately 1 percent of the voting power and 99 percent of the economic
interest in ILM Holding.
As discussed further in the Annual Report, the Company has been
attempting to continue its restructuring plans by converting ILM Holding to
a real estate investment trust ("REIT") for tax purposes. In connection
with these plans, on November 21, 1996 the Company requested that PWPI
cause PWP Holding to sell all of the stock held by PWP Holding in ILM
Holding to the Company for a price equal to the fair market value of the 1%
economic interest in ILM Holding represented by the common stock. On
January 10, 1997, this transfer of the common stock of ILM Holding was
completed at an agreed upon fair value of $46,000. With this transfer
completed, effective January 23, 1997 ILM Holding recapitalized its common
stock and preferred stock by replacing the outstanding shares with 50,000
shares of new common stock and 275 shares of a new class of nonvoting, 8%
cumulative preferred stock issued to the Company. The number of authorized
shares of preferred and common stock in ILM Holding were also increased as
part of the recapitalization. Following the recapitalization, the Company
made charitable gifts of one share of the preferred stock in ILM Holding to
each of 111 charitable organizations so that ILM Holding would meet the
stock ownership requirements of a REIT as of January 30, 1997. The
preferred stock has a Liquidation Preference of $1,000 per share plus any
accrued and unpaid dividends. Dividends on the preferred stock will accrue
at a rate of 8% per annum on the original $1,000 Liquidation Preference and
will be cumulative from the date of issuance. Since ILM Holding is not
expected to have sufficient cash flow in the foreseeable future to make the
required dividend payments, it is anticipated that dividends will accrue
and be paid at liquidation. The Company recorded the contribution of the
preferred stock in ILM Holding to the charitable organizations at the
amount of the initial Liquidation Preference of $111,000. Such amount is
included in general and administrative expenses on the accompanying income
statement for the nine months ended May 31, 1997. Cumulative dividends in
arrears as of May 31, 1997 on the preferred stock in ILM Holding totalled
approximately $3,000.
At a Board meeting on January 10, 1997, the Company's Advisor recommended
the immediate sale of the senior housing facilities held by the Company and
an affiliated entity, PaineWebber Independent Living Mortgage Inc. II
("ILM2"), by means of a controlled auction to be conducted by PaineWebber,
at no additional compensation, with PaineWebber offering to purchase the
properties for $127 million, thereby guaranteeing the shareholders a
"floor" price. The Advisor also stated that if PaineWebber purchased the
properties at the specified price and were then able to resell the
properties at a higher price, PaineWebber would pay any "excess profits" to
the shareholders. To assist the Company and ILM I Lease Corporation (see
Note 2) in evaluating the Advisor's proposal, a disinterested, independent
investment banker with expertise in healthcare REITs and
independent/assisted living financings was engaged. Following a
comprehensive analysis, the investment banker recommended that the Company
decline the Advisor's proposal and instead investigate expansion and
restructuring alternatives. After analyzing the Advisor's proposal and the
recommendations and other information provided by the independent
investment banker, the Boards of the Company and ILM2 voted unanimously to
decline the Advisor's proposal and to explore the alternatives recommended
by the independent investment banker. The Boards declined to seek an
immediate sale of the properties because, in the Boards' view, the
liquidation price would not reflect the "going concern" value of the
Company and ILM2 and, therefore, would not maximize shareholder value. In
addition, the Boards did not consider it advisable to liquidate the Company
and ILM2 on the suggested terms three years prior to their scheduled
termination date.
The Advisor had indicated to the Board in its January 10, 1997 proposal
that it would not wish to continue to serve as advisor to the Company and
its affiliates if the Company declined to accept the Advisor's proposal.
The Company has accepted the resignation of the Advisor, effective as of
June 18, 1997. The Advisor has agreed to continue to provide certain
administrative services to the Company and its affiliates through August
31, 1997, pursuant to the terms of a transition services agreement to be
entered into with the Company and its affiliates. The Company and its
affiliates have also accepted, effective as of June 18, 1997, the
resignations of those officers and directors who are employees of or
otherwise affiliated with the Advisor or its affiliates. The Company is
currently evaluating various strategic alternatives, including the
possibility of becoming self-managed.
In addition, the Company and ILM I Lease Corporation are continuing to
review various restructuring alternatives that could further increase
shareholder value and liquidity. The Company and ILM I Lease Corporation
are analyzing a merger of the Company with ILM Holding and are also
considering possibly merging the Company with ILM2 and ILM I Lease
Corporation with ILM II Lease Corporation. In addition, the Company is
exploring listing its shares on an exchange or, alternatively, having them
trade through NASDAQ. The independent investment banker is also in the
process of developing a new reorganization proposal. The Company has not
fully evaluated any of these alternatives and is not in a position at this
time to recommend any actions to the shareholders. There can be no
assurance that the Company will recommend taking any of such actions.
2. Operating Investment Properties Subject to Master Lease
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:
<TABLE>
<CAPTION>
Rentable Date of
Name Location Units (1) Investment (2)
---- -------- --------- --------------
<S> <C> <C> <C>
Independence Village of East Lansing East Lansing, MI 161 6/29/89
Independence Village of Winston-Salem Winston-Salem, NC 159 6/29/89
Independence Village of Raleigh Raleigh, NC 164 4/29/91
Independence Village of Peoria Peoria, IL 165 11/30/90
Crown Pointe Apartments Omaha, NE 135 2/14/90
Sedgwick Plaza Apartments Wichita, KS 150 2/14/90
West Shores Hot Springs, AR 136 12/14/90
Villa Santa Barbara (3) Santa Barbara, CA 125 7/13/92
</TABLE>
(1) The number of rentable units has been adjusted to account for the new
property management team's current program of placing non-rental units
back into service.
(2) Represents the date of the Company's original mortgage loan to Angeles
Housing Concepts, Inc. ("AHC"). See the further discussion in the
Annual Report.
(3) The acquisition of the California Facility was financed jointly by the
Company and ILM2. All amounts generated from Villa Santa Barbara are
equitably apportioned between the Company, together with its
consolidated subsidiary, and ILM2, together with its consolidated
subsidiary, generally 25% and 75%, respectively.
As discussed in Note 1, ILM Holding holds title to each Senior Housing
Facility subject to a first mortgage loan payable to the Company. The
principal balance on each loan was modified to reflect the estimated fair
value of the related operating property as of April 1, 1994, the date of the
transfer of ownership from AHC. The modified loans, which had an aggregate
principal balance of $54,998,000 at May 31, 1997 and August 31, 1996,
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 on December 31, 1999.
As discussed further in the Annual Report, effective September 1, 1995 the
properties were leased to a newly formed company, ILM I Lease Corporation,
pursuant to the terms of a master lease which covers all of the Senior
Housing Facilities. 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. The master lease agreement
is between ILM Holding, as owner and Lessor of the properties, 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 the second quarter
of fiscal 1997, and for each fiscal quarter 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 such fiscal quarter over
$4,249,000. The Company earned variable rent of $199,000 for the six months
ended May 31, 1997. 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, personal property and non-structural repairs in connection with
the operation of the Facilities. The Lessor, as the owner of the Facilities,
is responsible for major capital improvements and structural repairs to the
Facilities.
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 filings with the United States Securities and
Exchange Commission are as follows (in thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Rental income $4,568 $4,331 $13,394 $12,871
Expenses:
Property management fees 222 239 637 709
Property operating expenses 2,123 1,976 6,306 5,929
Real estate taxes 193 207 616 607
------ ------ ------- -------
2,538 2,422 7,559 7,245
------ ------ ------- -------
$2,030 $1,909 $ 5,835 $ 5,626
====== ====== ======= =======
<PAGE>
3. Related Party Transactions
Accounts receivable - related party at May 31, 1997 and August 31, 1996
includes advances made to ILM I Lease Corporation primarily for the purchase
of personal property to operate the Senior Housing Facilities. Accounts
receivable - related party at May 31, 1997 also includes additional variable
rent due from ILM I Lease Corporation in accordance with the terms of the
Master Lease Agreement.
The Advisor to the Company earned management fees of $66,000 for each of
the nine months ended May 31, 1997 and 1996. Accounts payable affiliates at
both May 31, 1997 and August 31, 1996 consists of management fees owed to the
Advisor.
As discussed in Note 1, the Company has accepted the resignation of the
Advisor effective as of June 18, 1997. The Company and the Advisor intend to
enter into a transition services agreement pursuant to which the Advisor
would continue to provide certain administrative services to the Company and
its affiliates through August 31, 1997.
Included in general and administrative expenses for the nine months ended
May 31, 1997 and 1996 is $116,000 and $115,000, 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, 1997 and 1996 is $6,000 and $8,000, respectively, representing
fees earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc.,
for managing the Company's cash assets.
4. Contingencies
On July 29, 1996, ILM I Lease Corporation and ILM Holding ("the
Companies") terminated a property management agreement with AHC covering the
eight Senior Housing Facilities leased by ILM I Lease Corporation from ILM
Holding, the Company's consolidated affiliate. The management agreement was
terminated for cause pursuant to Sections 1.05 (a) (i), (iii) and (iv) of the
agreement. 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. ILM I Lease
Corporation and ILM Holding allege, 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 agreement for cause, no termination fee was paid to AHC. Subsequent to
the termination of the management agreement, AHC filed for protection under
Chapter 11 of the U.S. Bankruptcy Code in its domestic state of California.
The filing was challenged by the Companies, and the Bankruptcy Court
dismissed AHC's case effective October 15, 1996. In November 1996, AHC filed
with the Virginia District Court an Answer in response to the litigation
initiated by the Companies and a Counterclaim against ILM Holding. The
Counterclaim alleges that the management agreement was wrongfully terminated
for cause and requests damages which include the payment of a termination fee
in the amount of $1,250,000, payment of management fees pursuant to the
contract from August 1, 1996 through October 15, 1996, and recovery of
attorney's fees and expenses. The aggregate amount of damages against all
parties as requested in AHC's Counterclaim exceeds $2,000,000. The Company
has guaranteed the payment of the termination fee at issue in these
proceedings to the extent that any termination fee is deemed payable by the
court and in the event that ILM I Lease Corporation fails to perform pursuant
to its obligations under the management agreement. The court initially set a
trial date of April 28, 1997 but, at AHC's request, recently rescheduled the
trial for June 23, 1997. On June 13, 1997 and July 8, 1997, the court issued
Orders purporting to enter judgment against the Company and ILM2 in the
amount of $1,000,000. In so doing, the court effectively canceled the June
23, 1997 trial date. The Orders do not contain any findings of fact or
conclusions of law. On July 10, 1997, the Company, ILM2, ILM I Lease
Corporation and ILM II Lease Corporation filed a notice of appeal to the
United State Court of Appeals for the Fourth Circuit from the Orders. The
Company intends to diligently prosecute the appeal. The eventual outcome of
this litigation cannot presently be determined. However, provision for the
liability which might result to the Company from the court's order entering
a $1,000,000 judgment has been recorded in the accompanying financial
statements.
ILM I Lease Corporation retained Capital Senior Management 2, Inc.
("Capital") of Dallas, Texas to be the new manager of the Senior Housing
Facilities pursuant to a Management Agreement which commenced on July 29,
1996. The initial term of the Management Agreement expires on December 31,
1999, which coincides with the expiration of the master lease agreement
between ILM Holding and ILM I Lease Corporation described in Note 2. Under
the terms of the Management Agreement, in the event that the master lease
agreement is extended beyond December 31, 1999, the Management Agreement will
be extended as well, but not beyond July 29, 2001. Effective in November
1996, Lawrence A. Cohen, President, Chief Executive Officer and Director of
the Company, was also named Vice Chairman and Chief Financial Officer of
Capital Senior Living Corporation, an affiliate of Capital. Under the terms
of the Management Agreement, Capital earns a Base Management Fee equal to 4%
of the Gross Operating Revenues of the Senior Housing Facilities, as defined.
Capital is also eligible to earn an Incentive Management Fee equal to 25% of
the amount by which the average monthly Net Cash Flow of the Senior Housing
Facilities, as defined, for the twelve month period ending on the last day of
each calendar month exceeds a specified Base Amount. Each August 31,
beginning on August 31, 1997, the Base Amount will be increased based on the
percentage increase in the Consumer Price Index. The Company has guaranteed
the payment of all fees due to Capital under the terms of the Management
Agreement in the event that ILM I Lease Corporation fails to perform pursuant
to its obligations. In conjunction with the execution of this Management
Agreement, the Company entered into an agreement with Capital which specifies
that if the Company chooses to sell the Senior Housing Facilities during the
term of the agreement, Capital has the right to present first and last offers
to purchase the Facilities. Notwithstanding such right, the Company may
determine, at any time and in its sole discretion, not to engage in a sale
transaction or to accept any offer received whether from Capital or a third
party.
On February 4, 1997, AHC filed a Complaint in the Superior Court of the
State of California against Capital, Lawrence Cohen, and others alleging that
the defendants intentionally interfered with AHC's property management
agreement (the "California litigation"). The complaint seeks damages of at
least $2,000,000. On March 4, 1997, the defendants removed the case to
federal district court in the Central District of California. Trial in the
action has been set for January 13, 1998 and discovery has just begun. 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 Properties employee, the Company or its
affiliates should indemnify Mr. Cohen with respect to any expenses arising
from the California litigation, subject to any insurance recoveries for those
expenses. The Company's Board also concluded that, subject to certain
conditions, the Company or its affiliates should advance up to $20,000 to pay
reasonable legal fees and expenses incurred by Capital in the California
litigation. Subsequently, the boards of directors of ILM I Lease Corporation
and ILM II Lease Corporation voted to increase the maximum amount of the
advance to $100,000. The defendants intend to vigorously defend the claims
made against them in the California litigation. The eventual outcome of this
litigation cannot presently be determined and, accordingly, no provision for
any liability has been recorded in the accompanying financial statements.
As discussed in more detail in the Annual Report, the Company and its
Advisor have been involved in certain shareholder-related litigation. In
March 1997, the United States District Court for the Southern District of New
York announced its final approval of the proposed settlement of the New York
Limited Partnership Actions (see the Annual Report for further information).
The release of the agreed upon settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement agreement by two of the
plaintiff class members. As part of the settlement agreement, PaineWebber has
agreed not to seek indemnification from the related partnerships and real
estate investment trusts at issue in the litigation (including the Company)
for any amounts that it is required to pay under the settlement. In addition,
in December 1996 PaineWebber agreed to settle the Abbate, Bandrowski and
Barstad actions discussed further in the Annual Report. Final releases and
dismissals with regard to these actions were received during the quarter
ended May 31, 1997. Based on these settlement agreements which cover all of
the outstanding shareholder litigation, and notwithstanding the appeal of the
class action settlement referred to above, management does not expect that
the resolution of these matters will have a material impact on the Company's
financial statements, taken as a whole.
5. Subsequent Events
On June 14, 1997, the Company's Board of Directors declared a quarterly
dividend for the quarter ended May 31, 1997. On July 15, 1997, a dividend of
$0.1875 per share of common stock, totalling approximately $1,410,000, will
be paid to shareholders of record as of June 30, 1997.
As discussed in Note 1, the Company has accepted the resignation of the
Advisor effective as of June 18, 1997. The Company and the Advisor intend to
enter into a transition services agreement pursuant to which the Advisor
would continue to provide certain administrative services to the Company and
its affiliates through August 31, 1997.
<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, 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, 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. The master lease agreement is between the Company's
consolidated subsidiary, ILM Holding, Inc. ("ILM Holding"), as owner and Lessor
of the properties, 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 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 the second quarter of
fiscal 1997, and for each fiscal quarter 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 such fiscal quarter over $4,249,000. The
Company earned variable rent of $199,000 for the six months ended May 31, 1997.
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, personal property and
non-structural repairs in connection with the operation of the Facilities. The
Lessor, as the owner of the Facilities, is responsible for major capital
improvements and structural repairs to the Facilities.
As discussed further in the Annual Report, the Company has been attempting
to continue its restructuring plans by converting ILM Holding to a real estate
investment trust ("REIT") for tax purposes. In connection with these plans, on
November 21, 1996 the Company requested that PWPI cause PWP Holding to sell all
of the stock held by PWP Holding in ILM Holding to the Company for a price equal
to the fair market value of the 1% economic interest in ILM Holding represented
by the common stock. On January 10, 1997, this transfer of the common stock of
ILM Holding was completed at an agreed upon fair value of $46,000. With this
transfer completed, effective January 23, 1997 ILM Holding recapitalized its
common stock and preferred stock by replacing the outstanding shares with 50,000
shares of new common stock and 275 shares of a new class of nonvoting, 8%
cumulative preferred stock issued to the Company. The number of authorized
shares of preferred and common stock in ILM Holding were also increased as part
of the recapitalization. Following the recapitalization, the Company made
charitable gifts of one share of the preferred stock in ILM Holding to each of
111 charitable organizations so that ILM Holding would meet the stock ownership
requirements of a REIT as of January 30, 1997. The preferred stock has a
Liquidation Preference of $1,000 per share plus any accrued and unpaid
dividends. Dividends on the preferred stock will accrue at a rate of 8% per
annum on the original $1,000 Liquidation Preference and will be cumulative from
the date of issuance. Since ILM Holding is not expected to have sufficient cash
flow in the foreseeable future to make the required dividend payments, it is
anticipated that dividends will accrue and be paid at liquidation. The Company
has recorded the contribution of the preferred stock in ILM Holding to the
charitable organizations at the amount of the initial Liquidation Preference of
$111,000. Such amount is included in general and administrative expenses in the
accompanying statements of income for the nine months ended May 31, 1997.
Cumulative dividends in arrears as of May 31, 1997 on the preferred stock in ILM
Holding totalled approximately $3,000.
At a Board meeting on January 10, 1997, the Company's Advisor recommended
the immediate sale of the senior housing facilities held by the Company and an
affiliated entity, PaineWebber Independent Living Mortgage Inc. II ("ILM2), by
means of a controlled auction to be conducted by PaineWebber, at no additional
compensation, with PaineWebber offering to purchase the properties for $127
million, thereby guaranteeing the shareholders a "floor" price. The Advisor also
stated that if PaineWebber purchased the properties at the specified price and
were then able to resell the properties at a higher price, PaineWebber would pay
any "excess profits" to the shareholders. To assist the Company and ILM I Lease
Corporation in evaluating the Advisor's proposal, a disinterested, independent
investment banker with expertise in healthcare REITs and independent/assisted
living financings was engaged. Following a comprehensive analysis, the
investment banker recommended that the Company decline the Advisor's proposal
and instead investigate expansion and restructuring alternatives. After
analyzing the Advisor's proposal and the recommendations and other information
provided by the independent investment banker, the Boards of the Company and
ILM2 voted unanimously to decline the Advisor's proposal and to explore the
alternatives recommended by the independent investment banker. The Boards
declined to seek an immediate sale of the properties because, in the Boards'
view, the liquidation price would not reflect the "going concern" value of the
Company and ILM2 and, therefore, would not maximize shareholder value. In
addition, the Boards did not consider it advisable to liquidate the Company and
ILM2 on the suggested terms three years prior to their scheduled termination
date.
The Advisor had indicated to the Board in its January 10, 1997 proposal
that it would not wish to continue to serve as advisor to the Company and its
affiliates if the Company declined to accept the Advisor's proposal. The Company
has accepted the resignation of the Advisor, effective as of June 18, 1997. The
Advisor has agreed to continue to provide certain administrative services to the
Company and its affiliates through August 31, 1997, pursuant to the terms of a
transition services agreement to be entered into with the Company and its
affiliates. The Company and its affiliates have also accepted, effective as of
June 18, 1997, the resignations of those officers and directors who are
employees of or otherwise affiliated with the Advisor or its affiliates. The
Company is currently evaluating various strategic alternatives, including the
possibility of becoming self-managed.
The Company and ILM I Lease Corporation are also considering additional
steps to increase shareholder value and liquidity. Several new programs have
recently been adopted across the Company's portfolio which are expected to
increase revenues and cash flow from the properties. These include increasing
the number of rentable apartment units as live-in facility managers move from
the properties and increasing rental rates at properties that have maintained
high occupancy levels and are located in strong markets. Another program to
increase revenues and cash flow involves investigating the potential for future
expansions of several of the facilities which are located in areas that have
particularly strong markets for senior housing.
In addition, the Company and ILM I Lease Corporation are continuing to
review various restructuring alternatives that could further increase
shareholder value and liquidity. The Company and ILM I Lease Corporation are
analyzing a merger of the Company with ILM Holding and are also considering
possibly merging the Company with ILM2 and ILM I Lease Corporation with ILM II
Lease Corporation. In addition, the Company is exploring listing its shares on
an exchange or, alternatively, having them trade through NASDAQ. The independent
investment banker is also in the process of developing a new reorganization
proposal. The Company has not fully evaluated any of these alternatives and is
not in a position at this time to recommend any actions to the shareholders.
There can be no assurance that the Company will recommend taking any of such
actions.
The assumption of ownership of the properties through ILM Holding, which
was organized as a regular C corporation for tax purposes, has resulted in 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 in a C
corporation. Any future appreciation in the value of the Senior Housing
Facilities subsequent to the conversion of ILM Holding to a REIT will not be
subject to the built-in gain tax. The built-in gain tax would most likely not be
incurred if the properties were to be held for a period of at least 10 years
from the date of the conversion of ILM Holding to a REIT. Based on management's
estimate of the increase in the values of the properties which occurred since
April 1994, as supported by independent appraisals, a sale of the properties at
their estimated market 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.
On July 29, 1996, ILM I Lease Corporation and ILM Holding ("the
Companies") terminated the property management agreement with Angeles Housing
Concepts, Inc. ("AHC") covering the eight Senior Housing Facilities leased by
ILM I Lease Corporation from ILM Holding. The management agreement was
terminated for cause pursuant to the terms of the contract. Simultaneously with
the termination of the management agreement, the Companies, together with
certain affiliated entities, filed suit against AHC in the United States
District Court for the Eastern District of Virginia for breach of contract,
breach of fiduciary duty and fraud. ILM I Lease Corporation and ILM Holding
allege, 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 agreement for cause, no termination
fee was paid to AHC. Subsequent to the termination of the management agreement,
AHC filed for protection under Chapter 11 of the U.S. Bankruptcy Code in its
domestic state of California. The filing was challenged by the Companies, and
the Bankruptcy Court dismissed AHC's case effective October 15, 1996. In
November 1996, AHC filed with the Virginia District Court an Answer in response
to the litigation initiated by the Companies and a Counterclaim against ILM
Holding. The Counterclaim alleges that the management agreement was wrongfully
terminated for cause and requests damages which include the payment of a
termination fee in the amount of $1,250,000, payment of management fees pursuant
to the contract from August 1, 1996 through October 15, 1996, and recovery of
attorney's fees and expenses. The aggregate amount of damages against all
parties as requested in AHC's counterclaim exceeds $2,000,000. The Company has
guaranteed the payment of the termination fee at issue in these proceedings to
the extent that any termination fee is deemed payable by the court and in the
event that ILM I Lease Corporation fails to perform pursuant to its obligations
under the management agreement. The court initially set a trial date of April
28, 1997 but, at AHC's request, recently rescheduled the trial for June 23,
1997. On June 13, 1997 and July 8, 1997, the court issued Orders purporting to
enter judgment against the Company and ILM2 in the amount of $1,000,000. In so
doing, the court effectively canceled the June 23, 1997 trial date. The Orders
do not contain any findings of fact or conclusions of law. On July 10, 1997, the
Company, ILM2, ILM I Lease Corporation and ILM II Lease Corporation filed a
notice of appeal to the United State Court of Appeals for the Fourth Circuit
from the Orders. The Company intends to diligently prosecute the appeal. The
eventual outcome of this litigation cannot presently be determined. However,
provision for the liability which might result to the Company from the court's
order entering a $1,000,000 judgment fee has been recorded in the accompanying
financial statements.
ILM I Lease Corporation retained Capital Senior Management 2, Inc.
("Capital") of Dallas, Texas to be the new manager of the Senior Housing
Facilities pursuant to a Management Agreement which commenced on July 29, 1996.
The initial term of the Management Agreement expires on December 31, 1999, which
coincides with the expiration of the master lease agreement described above
between ILM Holding and ILM I Lease Corporation. Under the terms of the
Management Agreement, in the event that the master lease agreement is extended
beyond December 31, 1999, the Management Agreement will be extended as well, but
not beyond July 29, 2001. Effective in November 1996, Lawrence A. Cohen,
President, Chief Executive Officer and Director of the Company, was also named
Vice Chairman and Chief Financial Officer of Capital Senior Living Corporation,
an affiliate of Capital. Under the terms of the Management Agreement, Capital
earns a Base Management Fee equal to 4% of the Gross Operating Revenues of the
Senior Housing Facilities, as defined. Capital is also eligible to earn an
Incentive Management Fee equal to 25% of the amount by which the average monthly
Net Cash Flow of the Senior Housing Facilities, as defined, for the twelve month
period ending on the last day of each calendar month exceeds a specified Base
Amount. Each August 31, beginning on August 31, 1997, the Base Amount will be
increased based on the percentage increase in the Consumer Price Index. The
Company has guaranteed the payment of all fees due to Capital under the terms of
the Management Agreement in the event that ILM I Lease Corporation fails to
perform pursuant to its obligations. In conjunction with the execution of this
Management Agreement, the Company entered into an agreement with Capital which
specifies that if the Company chooses to sell the Senior Housing Facilities
during the term of the agreement, Capital has the right to present first and
last offers to purchase the Facilities. Notwithstanding such right, the Company
may determine, at any time and in its sole discretion, not to engage in a sale
transaction or to accept any offer received whether from Capital or a third
party.
On February 4, 1997, AHC filed a Complaint in the Superior Court of the
State of California against Capital, Lawrence Cohen, and others alleging that
the defendants intentionally interfered with AHC's property management agreement
(the "California litigation"). The complaint seeks damages of at least
$2,000,000. On March 4, 1997, the defendants removed the case to federal
district court in the Central District of California. Trial in the action has
been set for January 13, 1998 and discovery has just begun. 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
Properties employee, the Company or its affiliates should indemnify Mr. Cohen
with respect to any expenses arising from the California litigation, subject to
any insurance recoveries for those expenses. The Company's Board also concluded
that, subject to certain conditions, the Company or its affiliates should
advance up to $20,000 to pay reasonable legal fees and expenses incurred by
Capital in the California litigation. Subsequently, the boards of directors of
ILM I Lease Corporation and ILM II Lease Corporation voted to increase the
maximum amount of the advance to $100,000. The defendants intend to vigorously
defend the claims made against them in the California litigation. The eventual
outcome of this litigation cannot presently be determined and, accordingly, no
provision for any liability has been recorded in the accompanying financial
statements.
The Company's net operating cash flow is expected to be relatively stable
and predictable now that the master lease structure is in place. The annual base
rental payments owed to ILM Holding increased to $6,364,800 effective January 1,
1996 and will remain at that level for the remainder of the lease term. In
addition, the Senior Housing Facilities are currently generating gross revenues
which are in excess of the specified threshold in the variable rent calculation,
as discussed further above, which became effective on December 1, 1996. As a
result of the status of the Company's net operating cash flow under the current
master lease arrangement, the Company increased its quarterly dividend payment
from $0.175 per share to $0.1875 per share effective with the dividend paid in
January 1997 for the quarter ended November 30, 1996. This increase raises the
dividend payment to the equivalent of a 7.5% annual return on the original
offering price of the Company's common stock.
As noted above, ILM Holding, as Lessor, is responsible for major capital
improvements and structural repairs to the Senior Housing Facilities. The fiscal
1997 capital expenditure plans include an ongoing program to replace
air-conditioning units at the Santa Barbara facility and a potential program to
upgrade the overall appearance of the Sedgwick Plaza property. In addition, as
discussed in the Annual Report, the Company has been investigating the potential
to expand certain facilities that are located in strong markets or from possible
future equity offerings depending on the market. Specifically, the investigation
has focused on the facilities located in East Lansing, Raleigh, Omaha and Hot
Springs. The Board of Directors has concluded that obtaining control of adjacent
land for future expansion purposes could add significant value to these
properties. In addition, the Board also believes that pursuing potential
expansion opportunities could yield substantial increases in cash flow and
value. During the current quarter, the Board entered into agreements to purchase
land adjacent to three of these facilities. The Board obtained an agreement to
purchase two acres of land adjacent to the East Lansing facility. The purchase
price has been set at $200,000 and closing is expected to occur in August. The
Board also obtained an agreement to purchase two acres of land adjacent to the
Raleigh facility. The purchase price has been set at $450,000 and closing is
expected to occur by the end of fiscal 1997. In addition, the Board obtained an
agreement to purchase three and one-half acres of land adjacent to the Omaha
facility. The purchase price has been set at $400,000 and closing is expected to
occur during the first quarter of fiscal 1998. The Hot Springs facility already
includes a vacant parcel of approximately two acres which could accommodate an
expansion of the existing facility or the construction of a new, free-standing
assisted living facility. A comprehensive cost-benefit analysis of any potential
expansion program will be prepared and evaluated before any expansion decision
is made. Depending on the extent of any expansions deemed appropriate, such
plans could result in the need for substantial capital.
At May 31, 1997, the Company had cash and cash equivalents of $3,610,000.
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 subsidiary for certain capital improvements, and for dividends to
the shareholders. 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. At the present time, the Company's consolidated
affiliate, ILM Holding, is not expected to have sufficient cash flow during
fiscal 1997 to (i) meet its obligations to make the debt service payments due to
the Company under the mortgage loans, (ii) pay for capital improvements and
structural repairs in accordance with the terms of its master lease with ILM I
Lease Corporation and (iii) pay for costs that may be incurred in defending
AHC's counter claim against ILM Holding, as discussed further above. If ILM
Holding's liquidity problem is not resolved through the Company's completion of
its restructuring plans or otherwise, ILM Holding may not be able to make
payments on the mortgage loans to the Company in the amounts required by the
applicable loan agreements. 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, 1997
- -------------------------------
Net income decreased by $547,000 for the three months ended May 31, 1997,
when compared to the same period in the prior year. The decrease in net income
is mainly the result of an accrual for a possible termination fee payable to AHC
in connection with the litigation discussed further above. The Company's share
of the $1,000,000 judgment referred to above could be as much as $600,000, which
was recorded as a liability in the Company's financial statements during the
third quarter of fiscal 1997. The termination fee expense was partially offset
by an increase in rental income of $128,000 for the third quarter of fiscal
1997. Rental income increased due to the accrual of additional variable rent
effective December 1, 1996 in accordance with the terms of the Master Lease
Agreement, as discussed further in the notes to the accompanying financial
statements. Increases in general and administrative expenses, professional fees
and Directors' compensation of $10,000, $46,000 and $27,000, respectively, also
contributed to the decline in net income for the current three-month period. The
increase in general and administrative expenses is primarily due to an increase
in directors and officers liability insurance costs for the current three-month
period. The increase in professional fees is largely attributable to the cost of
the advisory services provided to the Board of Directors by the independent
investment banker referred to above. Legal fees declined for the current
three-month period mainly as a result of expenses associated with the spin-off
of ILM I Lease Corporation which were incurred in the prior period. Director's
compensation is higher in the current period due to the increase in the number
of independent directors from two to five which occurred during the current
fiscal year.
Nine Months Ended May 31, 1997
- ------------------------------
Net income decreased by $485,000 for the nine months ended May 31, 1997,
when compared to the same period in the prior year. The decrease in net income
resulted from an accrual for a possible termination fee payable to AHC in
connection with the litigation discussed further above. The Company's share of
the $1,000,000 judgment referred to above could be as much as $600,000, which
was recorded as a liability in the Company's financial statements during the
third quarter of fiscal 1997. The termination fee expense was partially offset
by an increase in rental income of $199,000 for the nine months ended May 31,
1997. Rental income increased due to the accrual of additional variable rent
effective December 1, 1996 in accordance with the terms of the Master Lease
Agreement, as discussed further in the notes to the accompanying financial
statements. Increases in general and administrative expenses, professional fees
and Directors' compensation of $16,000, $34,000 and $39,000, respectively, also
contributed to the decline in net income for the current nine-month period.
General and administrative expenses increased primarily due to the inclusion of
the charitable contribution expense of $111,000 described above in the results
for the current nine-month period. This amount was partially offset by a decline
in state franchise tax expense for the current nine-month period. The increase
in professional fees is largely attributable to the costs of the advisory
services provided to the Board of Directors by the independent investment banker
referred to above. Legal fees declined for the current nine-month period mainly
as a result of expenses associated with the spin-off of ILM I Lease Corporation
which were incurred in the prior period. Director's compensation is higher in
the current period due to the increase in the number of independent directors
from two to five which occurred during the current fiscal year.
<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. On July 17, 1996, PaineWebber and
the class plaintiffs submitted a definitive settlement agreement which provides
for the complete resolution of the class action litigation, including releases
in favor of the Company and PWPI, and the allocation of the $125 million
settlement fund among investors in the various partnerships and REITs at issue
in the case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships
and REITs. The details of the settlement are described in a notice mailed
directly to class members at the direction of the court. A final hearing on the
fairness of the proposed settlement was held in December 1996, and in March 1997
the court announced its final approval of the settlement. The release of the
$125 million of settlement proceeds has not occurred to date pending the
resolution of an appeal of the settlement agreement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Company) for any amounts that
it is required to pay under the settlement. In addition, in December 1996
PaineWebber agreed to settle the Abbate, Bandrowski and Barstad actions
discussed further in the Annual Report. Final releases and dismissals with
regard to these actions were received in April 1997. Based on these settlement
agreements which cover all of the outstanding shareholder litigation, and
notwithstanding the appeal of the class action settlement referred to above,
management does not expect that the resolution of these matters will have a
material impact 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/Lawrence A. Cohen
--------------------
Lawrence A. Cohen
President
Dated: July 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the nine months ended May 31,
1997 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-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 3,610
<SECURITIES> 0
<RECEIVABLES> 548
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,221
<PP&E> 48,626
<DEPRECIATION> 12,187
<TOTAL-ASSETS> 40,755
<CURRENT-LIABILITIES> 876
<BONDS> 0
0
0
<COMMON> 65,786
<OTHER-SE> (26,018)
<TOTAL-LIABILITY-AND-EQUITY> 40,755
<SALES> 0
<TOTAL-REVENUES> 5,062
<CGS> 0
<TOTAL-COSTS> 2,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,536
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,536
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>