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: 0-18942
PAINEWEBBER INDEPENDENT LIVING MORTGAGE INC. II
-----------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 06-1293758
-------- ----------
(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 Stocks 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: 5,181,236. The
aggregate sales price of the shares sold was $51,812,356. This does not
reflect market value. There is no current market for these shares.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE INC. II
CONSOLIDATED BALANCE SHEETS
May 31, 1997 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
May 31 August 31
------ ---------
Operating investment properties, at cost:
Land $ 5,030 $ 5,030
Building and improvements 29,096 28,946
Furniture, fixtures and equipment 3,765 3,765
---------- ---------
37,891 37,741
Less: accumulated depreciation (6,959) (6,005)
---------- ---------
30,932 31,736
Cash and cash equivalents 2,334 1,694
Interest and other receivables 118 181
Accounts receivable - related party 294 225
Prepaid expenses and other assets 36 9
Deferred rent receivable 108 131
---------- ---------
$ 33,822 $ 33,976
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 189 $ 68
Accounts payable - affiliates 32 32
Other liabilities 205 -
Accrued termination fee payable 400 -
Minority interest in consolidated subsidiary 111 -
Shareholders' equity 32,885 33,876
--------- ---------
$ 33,822 $ 33,976
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE INC. II
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 $ 1,131 $ 1,001 $ 3,264 $ 3,003
Interest income 27 12 71 41
-------- -------- ------- -------
1,158 1,013 3,335 3,044
Expenses:
Depreciation expense 318 306 954 953
Management fees 32 32 97 97
Termination fee 400 - 400 -
General and administrative 66 59 252 244
Professional fees 123 88 234 212
Directors' compensation 33 6 57 18
-------- -------- ------- -------
972 491 1,994 1,524
-------- -------- ------- -------
Net income $ 186 $ 522 $ 1,341 $ 1,520
======== ======== ======= =======
Earnings per share of
common stock $ 0.04 $ 0.10 $ 0.26 $ 0.29
======== ======== ======= =======
Cash dividends paid per
share of common stock $ 0.16 $ 0.13 $ 0.45 $ 0.38
======== ======== ====== ======
The above earnings and cash dividends paid per share of common stock are
based upon the 5,181,236 shares outstanding for each period.
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE INC. II
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 5,181 $ 52 $44,823 $(9,995) $34,880
Cash dividends paid - - - (1,943) (1,943)
Distribution of
stock in ILM II
Lease Corporation - - - (500) (500)
Net income - - - 1,520 1,520
----- ------ ------- -------- --------
Shareholders' equity
at May 31, 1996 5,181 $ 52 $44,823 $(10,918) $33,957
===== ====== ======= ======== =======
Shareholders' equity
at August 31, 1996 5,181 $ 52 $44,823 $(10,999) $33,876
Cash dividends paid - - - (2,332) (2,332)
Net income - - - 1,341 1,341
----- ------ ------- -------- -------
Shareholders' equity
at May 31, 1997 5,181 $ 52 $44,823 $(11,990) $32,885
===== ====== ======= ======== =======
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE INC. II
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 $ 1,341 $ 1,520
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense 954 953
Charitable contribution of preferred stock
in ILM Holding 111 -
Changes in assets and liabilities:
Accounts receivable - related party (69) 30
Interest and other receivables 63 (101)
Deferred rent receivable 23 (98)
Prepaid expenses and other assets (27) 111
Accounts payable - affiliates - (25)
Accounts payable and accrued expenses 121 (612)
Other liabilities 205 -
Accrued termination fee payable 400 -
---------- ---------
Total adjustments 1,781 258
---------- ---------
Net cash provided by operating activities 3,122 1,778
Cash flows from investing activities:
Funding of initial working
capital to ILM II Lease Corporation - (500)
Additions to operating investment properties (150) (203)
---------- ---------
Net cash used in investing activities (150) (703)
Cash flows from financing activities:
Cash dividends paid to shareholders (2,332) (1,943)
---------- ---------
Net increase (decrease) in cash and cash equivalents 640 (868)
Cash and cash equivalents, beginning of period 1,694 2,409
---------- ---------
Cash and cash equivalents, end of period $ 2,334 $ 1,541
========== =========
See accompanying notes.
<PAGE>
PAINEWEBBER INDEPENDENT LIVING MORTGAGE INC. II
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
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 II Holding, Inc. ("ILM
Holding"). ILM Holding holds title to the six 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 $495,000 and
had issued 10,000 shares of Common Stock to PWP Holding in return for a
capital contribution in the amount of $5,000. 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 $40,000. 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 Fund,
Inc. ("ILM1"), by means of a controlled auction to be conducted by
PaineWebber with PaineWebber offering to purchase the properties for $127
million, thereby guaranteeing the shareholders a "floor" price. The
Adviser 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 II 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 ILM1 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 ILM1 and, therefore, would not
maximize shareholder value. In addition, the Boards did not consider it
advisable to liquidate the Company and ILM1 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 II Lease Corporation are continuing to
review various restructuring alternatives that could further increase
shareholder value and liquidity. The Company and ILM II Lease Corporation
are analyzing a merger of the Company with ILM Holding and are also
considering possibly merging the Company with ILM1 and ILM II Lease
Corporation with ILM I 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
assurances that the Company will recommend taking any of such actions.
<PAGE>
2. Operating Investment Properties Subject to Master Lease
The accompanying financial statements include the Company's investments in
six 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>
The Palms Fort Myers, FL 205 Units 7/18/90
Crown Villa Omaha, NE 73 Units 4/25/91
Overland Park Place Overland Park, KS 139 Units 4/9/92
Rio Las Palmas Stockton, CA 164 Units 5/14/92
The Villa at Riverwood St. Louis County, MO 120 Units 5/29/92
Villa Santa Barbara (3) Santa Barbara, CA 125 Units 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 Santa Barbara Facility was financed jointly by
the Company and ILM1. All amounts generated from Villa Santa Barbara
are equitably apportioned between the Company, together with its
consolidated subsidiary, and ILM1, together with its consolidated
subsidiary, generally 75% and 25%, 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 $38,144,000 at May 31, 1997 and August 31, 1996,
require interest-only payments on a monthly basis at a rate of 7% from April
1, 1994 through December 1, 1994, 9% for the period from January 1 through
December 31, 1995, 11% for the period January 1 through December 31, 1996,
12% for the period January 1 through December 31, 1997, 13% for the period
January 1 through December 31, 1998, 13.5% for the period January 1, 1999
through December 31, 1999 and 14% for the period January 1, 2000 through
maturity on December 31, 2000.
As discussed further in the Annual Report, effective September 1, 1995 the
properties were leased to a newly formed company, ILM II Lease Corporation,
pursuant to the terms of a master lease which covers all of the Senior
Housing Facilities. ILM II 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 II 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 II Lease Corporation with
$500,000 from its existing cash reserves, which was an amount estimated to
provide ILM II Lease Corporation with necessary working capital. The master
lease agreement is between ILM Holding, as owner and Lessor of the
properties, and ILM II Lease Corporation, as Lessee. The master lease is a
"triple-net" lease with an original fixed term expiring December 31, 2000
(December 31, 1999 with respect to the Santa Barbara property). 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 II Lease Corporation is obligated to pay annual base rent for the
use of all of the Facilities in the aggregate amount of $3,548,700 for
calendar year 1995 (prorated based on the commencement date of the lease),
$4,035,600 for calendar years 1996 through 1999 and $3,555,427 for calendar
year 2000 (reflects rent reduction attributable to termination of lease for
Villa Santa Barbara on December 31, 1999). Beginning in the second quarter
of fiscal 1997, and for each fiscal quarter thereafter, ILM II 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
$3,255,250. The Company earned variable rent of $261,000 for the six months
ended May 31, 1997. In addition, as the Lessee, ILM II 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 II
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 $ 3,587 $3,304 $10,745 $9,702
Expenses:
Property management fees 169 181 549 534
Property operating expenses 1,841 1,724 5,584 5,172
Real estate taxes 129 143 383 391
-------- ------ ------- ------
2,139 2,048 6,516 6,097
-------- ------ ------- ------
$ 1,448 $1,256 $ 4,229 $3,605
======== ====== ======= ======
3. Related Party Transactions
Accounts receivable - related party at May 31, 1997 and August 31, 1996
includes advances made to ILM II 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 II Lease Corporation in accordance with the terms of the
Master Lease Agreement.
The Advisor to the Company earned management fees of $97,000 for each of
the nine-month periods ended May 31, 1997 and 1996. Accounts payable
affiliates at both May 31, 1997 and August 31, 1996 consists of management
fees of $32,000 payable 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 $89,000 and $85,000, 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 $3,000 and $4,000, 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 II Lease Corporation and ILM Holding ("the
Companies") terminated a property management agreement with AHC covering the
six Senior Housing Facilities leased by ILM II 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 II 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 $750,000, 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 II 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
ILM1 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, ILM1, 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 II 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,
2000, which coincides with the expiration of the master lease agreement
between ILM Holding and ILM II 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, 2000, 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 II 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 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
$0.1625 per share of common stock, totalling approximately $842,000, 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 INC. II
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, the Company
implemented a plan effective September 1, 1995 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 II 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 II 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 II 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 II Holding, Inc. ("ILM Holding") as owner and
Lessor of the properties, and ILM II Lease Corporation as Lessee. The master
lease is a "triple-net" lease with an original fixed term expiring December 31,
2000 (December 31, 1999 with respect to the Santa Barbara property). 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 II
Lease Corporation is obligated to pay annual base rent for the use of all of the
Facilities in the aggregate amount of $3,548,700 for calendar year 1995
(prorated based on the commencement date of the lease), $4,035,600 for calendar
years 1996 through 1999 and $3,555,427 for calendar year 2000 (reflects rent
reduction attributable to termination of lease for Villa Santa Barbara on
December 31, 1999). Beginning in the second quarter of fiscal 1997, and for each
fiscal quarter thereafter, ILM II 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 $3,255,250. The Company earned variable
rent of $261,000 for the six months ended May 31, 1997. In addition, as the
Lessee, ILM II 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. Subsequent to the end of the first quarter, on January 10,
1997, this transfer of the common stock of ILM Holding was completed at an
agreed upon fair value of $40,000. 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 on the accompanying statement 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 Fund, Inc. ("ILM1"),
by means of a controlled auction to be conducted by PaineWebber with PaineWebber
offering to purchase the properties for $127 million, thereby guaranteeing the
shareholders a "floor" price. The Adviser 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 II 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 ILM1 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 ILM1 and, therefore, would
not maximize shareholder value. In addition, the Boards did not consider it
advisable to liquidate the Company and ILM1 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 II 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 II Lease Corporation are continuing to
review various restructuring alternatives that could further increase
shareholder value and liquidity. The Company and ILM II Lease Corporation are
analyzing a merger of the Company with ILM Holding and are also considering
possibly merging the Company with ILM1 and ILM II Lease Corporation with ILM I
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 assurances 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 $2.3 million.
On July 29, 1996, ILM II Lease Corporation and ILM Holding ("the
Companies") terminated the property management agreement with Angeles Housing
Concepts, Inc. ("AHC") covering the six Senior Housing Facilities leased by ILM
II 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 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 II 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 $750,000, 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 II 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 ILM1 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, ILM1, 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 II 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, 2000, which
coincides with the expiration of the master lease agreement described above
between ILM Holding and ILM II Lease Corporation. Under the terms of the
Management Agreement, in the event that the master lease agreement is extended
beyond December 31, 2000, 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 II 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 $4,035,600 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 $0.125 per share to $0.1625 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 6.5% 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, as well as planned roof
repairs at Overland Park Place and The Palms. 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. Specifically, the
investigation has focused on the facilities located in Fort Myers and Omaha. 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. The Fort
Myers facility already includes approximately 1.5 acres of developable land
which was purchased in 1995 and added to the original 4.5 acre site. This excess
land could potentially accommodate a sizable expansion of the existing facility.
During the current quarter, 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. Subsequent to the end of the current quarter, the Board
also obtained an agreement to purchase a one-half acre parcel of land adjacent
to the Stockton facility. The purchase price has been set at $139,000 and
closing is expected to occur during the first quarter of fiscal 1998. 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 $2,334,000.
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. 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 or from
possible future equity offerings depending on the market. The source of future
liquidity and dividends to the shareholders is expected to be through master
lease payments from ILM II 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 subsidiary, 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 II Lease Corporation and
(iii) pay for costs that may be incurred in defending AHC's counterclaim 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 $336,000 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 $400,000, 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 $130,000 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 professional fees and Directors' compensation of
$35,000 and $27,000, respectively, also contributed to the decline in net income
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 II 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 $179,000 for the nine months ended May 31, 1997,
when compared to the same period in the prior year. The increase 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 $400,000, 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 $261,000 for the nine months ended May 31,
1997. Rental income increased for the nine months ended May 31, 1997 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
$8,000, $22,000 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 II 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 INC. II
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 INC. II
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> 2,334
<SECURITIES> 0
<RECEIVABLES> 412
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,782
<PP&E> 37,891
<DEPRECIATION> 6,959
<TOTAL-ASSETS> 33,822
<CURRENT-LIABILITIES> 826
<BONDS> 0
0
0
<COMMON> 44,875
<OTHER-SE> (11,990)
<TOTAL-LIABILITY-AND-EQUITY> 33,822
<SALES> 0
<TOTAL-REVENUES> 3,335
<CGS> 0
<TOTAL-COSTS> 1,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,341
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,341
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
