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 the period ended June 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to_____________
Commission file number 0-14268
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MCNEIL REAL ESTATE FUND XXII, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0085680
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13760 Noel Road, Suite 700, LB70, Dallas, Texas, 75240
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (214) 448-5800
-----------------------------
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
<PAGE>
MCNEIL REAL ESTATE FUND XXII, L.P.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------- --------------
ASSETS
- ------
Real estate investments:
<S> <C> <C>
Land..................................................... $ 380,414 $ 380,414
Buildings and improvements............................... 9,990,652 9,842,846
-------------- -------------
10,371,066 10,223,260
Less: Accumulated depreciation and amortization......... (4,927,686) (4,718,722)
-------------- -------------
5,443,380 5,504,538
Cash and cash equivalents................................... 703,847 629,747
Cash segregated for security deposits....................... 65,831 76,490
Accounts receivable......................................... 6,793 4,683
Escrow deposits............................................. 184,966 180,537
Prepaid expenses and other assets, net...................... 11,840 11,936
-------------- -------------
$ 6,416,657 $ 6,407,931
============== =============
LIABILITIES AND PARTNERS' DEFICIT
- ---------------------------------
Mortgage note payable, net.................................. $ 6,003,743 $ 6,026,515
Accounts payable and accrued expenses....................... 90,301 133,150
Accrued property taxes ..................................... 93,878 65,931
Payable to affiliates - General Partner..................... 1,643,701 1,527,935
Security deposits and deferred rental revenue............... 71,135 73,424
-------------- -------------
7,902,758 7,826,955
-------------- -------------
Partners' deficit:
Limited partners - 55,000,000 Units authorized;
33,176,117 and 33,208,117 Units issued and
outstanding at June 30, 1996 and December 31, 1995,
respectively (19,818,088 and 19,825,588 Current
Income Units outstanding at June 30, 1996 and
December 31, 1995, respectively, and 13,358,029
and 13,382,529 Growth/Shelter Units outstanding at
June 30, 1996 and December 31, 1995, respectively)..... (1,234,721) (1,168,315)
General Partner.......................................... (251,380) (250,709)
-------------- -------------
(1,486,101) (1,419,024)
-------------- -------------
$ 6,416,657 $ 6,407,931
============== =============
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants.
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
Revenue:
<S> <C> <C> <C> <C>
Rental revenue................ $ 560,146 $ 561,632 $ 1,116,301 $ 1,342,053
Interest...................... 8,131 6,956 15,825 12,942
Gain on legal settlement...... - 38,749 - 38,749
------------- ------------- ------------- -------------
Total revenue............... 568,277 607,337 1,132,126 1,393,744
------------- ------------- ------------- -------------
Expenses:
Interest...................... 145,572 146,651 291,506 391,326
Interest - affiliates......... - 276 - 18,568
Depreciation and
amortization................ 106,406 89,955 208,964 254,516
Property taxes................ 50,876 53,901 93,848 122,005
Personnel costs............... 68,160 75,157 152,354 172,845
Utilities..................... 26,338 34,369 69,148 79,182
Repair and maintenance........ 66,757 53,744 118,872 135,009
Property management
fees - affiliates........... 28,029 27,316 55,601 71,613
Other property operating
expenses.................... 25,117 29,495 51,865 71,679
General and administrative.... 26,301 18,322 41,788 39,680
General and administrative -
affiliates.................. 58,771 66,309 115,257 130,552
Loss on disposition of real
estate...................... - - - 245,637
------------- ------------- ------------- -------------
Total expenses.............. 602,327 595,495 1,199,203 1,732,612
------------- ------------- ------------- -------------
Net income (loss)................ $ (34,050) $ 11,842 $ (67,077) $ (338,868)
============= ============= ============= =============
Net income (loss) allocable
to limited partners - Current
Income Unit................... $ (3,064) $ 1,066 $ (6,037) $ (30,498)
Net income (loss) allocable
to limited partners - Growth
Shelter Unit.................. (30,645) 10,658 (60,369) (304,981)
Net income (loss) allocable
to General Partner............ (341) 118 (671) (3,389)
------------- ------------- ------------- -------------
Net income (loss)................ $ (34,050) $ 11,842 $ (67,077) $ (338,868)
============= ============= ============= =============
Net income (loss) per thousand
limited partnership units:
Current Income Units............. $ (.15) $ .05 $ (.30) $ (1.54)
============= ============= ============= =============
Growth/Shelter Units............. $ (2.29) $ .80 $ (4.52) $ (22.79)
============= ============= ============= ==============
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants.
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF PARTNERS' DEFICIT
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Deficit
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1994.............. $ (247,625) $ (863,021) $ (1,110,646)
Net loss
General Partner........................ (3,389) - (3,389)
Current Income Units................... - (30,498) (30,498)
Growth/Shelter Units................... - (304,981) (304,981)
------------- ------------- -------------
Total net loss............................ (3,389) (335,479) (338,868)
------------- ------------- -------------
Balance at June 30,1995................... $ (251,014) $ (1,198,500) $ (1,449,514)
============= ============= =============
Balance at December 31, 1995.............. $ (250,709) $ (1,168,315) $ (1,419,024)
Net loss
General Partner........................ (671) - (671)
Current Income Units................... - (6,037) (6,037)
Growth/Shelter Units................... - (60,369) (60,369)
------------- ------------- -------------
Total net loss............................ (671) (66,406) (67,077)
------------- ------------- -------------
Balance at June 30, 1996.................. $ (251,380) $ (1,234,721) $ (1,486,101)
============= ============= =============
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants.
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------------
1996 1995
------------------ ----------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from tenants........................ $ 1,127,749 $ 1,414,899
Cash received from legal settlement............... - 38,749
Cash paid to suppliers............................ (487,610) (505,101)
Cash paid to affiliates........................... (55,091) (225,655)
Interest received................................. 15,825 12,942
Interest paid..................................... (273,137) (402,209)
Interest paid to affiliates....................... - (149,043)
Property taxes paid and escrowed.................. (64,448) (89,698)
---------------- --------------
Net cash provided by operating activities............ 263,288 94,884
---------------- --------------
Cash flows from investing activities:
Additions to real estate investments.............. (147,806) (102,673)
Proceeds from sale of real estate................. - 738,914
---------------- --------------
Net cash provided by (used in) investing activities.. (147,806) 636,241
---------------- --------------
Cash flows from financing activities:
Principal payments on mortgage notes
payable......................................... (41,382) (51,557)
Repayment of advances from affiliates -
General Partner................................. - (784,654)
---------------- --------------
Net cash used in financing activities................ (41,382) (836,211)
---------------- --------------
Net increase (decrease)in cash and cash equivalents.. 74,100 (105,086)
Cash and cash equivalents at beginning of
period............................................ 629,747 589,211
---------------- --------------
Cash and cash equivalents at end of period........... $ 703,847 $ 484,125
================ ==============
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants.
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Reconciliation of Net Loss to Net Cash Provided by
Operating Activities
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------
1996 1995
----------------- ----------------
<S> <C> <C>
Net loss............................................. $ (67,077) $ (338,868)
--------------- --------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 208,964 254,516
Amortization of deferred borrowing costs.......... - 2,936
Amortization of discounts on mortgage
note payable.................................... 18,610 17,810
Interest added to advances from affiliates -
General Partner, net of payments................ - 18,568
Loss on disposition of real estate................ - 245,637
Changes in assets and liabilities:
Cash segregated for security deposits........... 10,659 10,147
Accounts receivable............................. (2,110) 57,439
Escrow deposits................................. (4,429) 130,686
Prepaid expenses and other assets............... 96 (5,577)
Accounts payable and accrued expenses........... (42,849) (47,764)
Accrued property taxes.......................... 27,947 (88,422)
Advances from affiliate - General Partner....... - (149,043)
Payable to affiliates - General Partner......... 115,766 (23,490)
Security deposits and deferred rental
revenue....................................... (2,289) 10,309
--------------- --------------
Total adjustments............................. 330,365 433,752
--------------- --------------
Net cash provided by operating activities............ $ 263,288 $ 94,884
=============== ==============
</TABLE>
The financial information included herein has been prepared by management
without audit by independent public accountants.
See accompanying notes to financial statements.
<PAGE>
MCNEIL REAL ESTATE FUND XXII, L.P.
Notes to Financial Statements
(Unaudited)
June 30, 1996
NOTE 1.
- -------
McNeil Real Estate Fund XXII, L.P., (the "Partnership"), formerly known as
Southmark Realty Partners II, Ltd., was organized on November 30, 1984 as a
limited partnership under the provisions of the California Revised Limited
Partnership Act to acquire and operate commercial and residential properties.
The general partner of the Partnership is McNeil Partners, L.P. (the "General
Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil
("McNeil"). The principal place of business for the Partnership and the General
Partner is 13760 Noel Road, Suite 700, LB70, Dallas, Texas, 75240.
In the opinion of management, the financial statements reflect all adjustments
necessary for a fair presentation of the Partnership's financial position and
results of operations. All adjustments were of a normal recurring nature.
However, the results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1996.
NOTE 2.
- -------
The financial statements should be read in conjunction with the financial
statements contained in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1995, and the notes thereto, as filed with the
Securities and Exchange Commission, which is available upon request by writing
to McNeil Real Estate Fund XXII, L.P., c/o McNeil Real Estate Management, Inc.,
Investor Services, 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240.
NOTE 3.
- -------
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. The Partnership has suffered
recurring losses from operations and the Partnership's only property is in need
of major capital improvements in order to maintain occupancy and rental rates at
a level to continue to support operations and debt service. Additionally, the
property is part of a four phase complex. Phase I of the complex defaulted on
the mortgage loan to the United States Department of Housing and Urban
Development in January 1993. The property is subject to foreclosure unless a
refinancing agreement can be reached with the lender. If Phase I is lost to
foreclosure, it would have a significant impact on the operations of Phase III,
owned by the Partnership, as the pool and clubhouse are located in Phase I. As
of June 30, 1996, no steps have been taken towards the foreclosure of Phase I.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
<PAGE>
NOTE 4.
- -------
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
NOTE 5.
- -------
The Partnership pays property management fees equal to 5% of the gross rental
receipts for its residential property and paid 6% of gross rental revenues for
its commercial property to McNeil Real Estate Management, Inc. ("McREMI"), an
affiliate of McNeil, for providing property management and leasing services.
The Partnership reimburses McREMI for its costs, including overhead, of
administering the Partnership's affairs.
The Partnership is incurring an asset management fee which is payable to the
General Partner. Through 1999, the asset management fee is calculated as 1% of
the Partnership's tangible asset value. Tangible asset value is determined by
using the greater of (i) an amount calculated by applying a capitalization rate
of 9% to the annualized net operating income of each property or (ii) a value of
$10,000 per apartment unit for residential property and $50 per gross square
foot for commercial property to arrive at the property tangible asset value. The
property tangible asset value is then added to the book value of all other
assets excluding intangible items. The fee percentage decreases subsequent to
1999. Total accrued but unpaid asset management fees of $1,058,574 were
outstanding at June 30, 1996.
The Partnership pays a disposition fee to an affiliate of the General Partner
equal to 3% of the gross sales price for brokerage services performed in
connection with the sale of the Partnership's properties. The fee is due and
payable at the time the sale closes. The Partnership incurred $138,750 of such
fees in connection with the sale of Wyoming Mall on March 31, 1995 which was
paid in April 1995.
The General Partner has, in its discretion, advanced funds to enable the
Partnership to meet its working capital requirements. The advances were
unsecured, due on demand and accrued interest at a rate equal to the prime
lending rate plus 1%.
McNeil Real Estate Fund XXI, L.P., an affiliate of the General Partner and joint
owner of Wyoming Mall had advanced funds to the Partnership for tenant
improvements and operations at Wyoming Mall. The advances were unsecured, due on
demand and accrued interest at a rate of prime plus 3 1/2%.
In April 1995, the Partnership utilized the proceeds from the sale of Wyoming
Mall to repay all outstanding affiliate advances and the related accrued
interest.
<PAGE>
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner and its affiliates are as follows:
Six Months Ended
June 30,
-----------------------
1996 1995
---------- ----------
Property management fees............................ $ 55,601 $ 71,613
Charged to interest - affiliates:
Interest on advances from affiliates - General
Partner........................................ - 18,568
Charged to loss on disposition of real estate:
Disposition fee.................................. - 138,750
Charged to general and administrative -
affiliates:
Partnership administration....................... 45,474 61,825
Asset management fee............................. 69,783 68,727
--------- ---------
$ 170,858 $ 359,483
========= =========
NOTE 6.
- -------
The Partnership filed claims with the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court") against
Southmark Corporation ("Southmark") for damages relating to improper
overcharges, breach of contract and breach of fiduciary duty. The Partnership
settled these claims in 1991, and such settlement was approved by the Bankruptcy
Court.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $29,292 in
cash, and common and preferred stock in the reorganized Southmark subsequently
sold for $9,457, which amounts represent the Partnership's pro-rata share of
Southmark assets available for Class 8 Claimants.
NOTE 7.
- -------
Martha Hess, et al. v. Southmark Realty Partners II, Ltd. (presently known as
McNeil Real Estate Fund XXII, L.P.), Southmark Income Investors, Ltd, Southmark
Equity Partners, Ltd., Southmark Realty Partners III, Ltd., and Southmark Equity
Partners II, Ltd., et al. ("Hess"); Kotowski v. Southmark Equity Partners, Ltd.
and Donald Arceri v. Southmark Income Investors, Ltd. These cases were
previously pending in the Illinois Appellate Court for the First District
("Appellate Court"), as consolidated Case No. 90-107. Consolidated with these
cases are an additional 14 matters against unrelated partnership entities. The
Hess case was filed on May 20, 1988, by Martha Hess, individually and on behalf
of a putative class of those similarly situated. The original, first, second and
third amended complaints in Hess sought rescission, pursuant to the Illinois
Securities Act, of over $2.7 million of principal invested in five Southmark
(now McNeil) partnerships, and other relief including damages for breach of
fiduciary duty and violation of the Illinois Consumer Fraud and Deceptive
Business Practices Act. The original, first, second and third amended complaints
<PAGE>
in Hess were dismissed against the defendant-group because the Appellate Court
held that they were not the proper subject of a class action complaint. Hess
was, thereafter, amended a fourth time to state causes of action against
unrelated partnership entities. Hess went to judgment against that unrelated
entity and the judgment, along with the prior dismissal of the class action, was
appealed. The Hess appeal was decided by the Appellate Court during 1992. The
Appellate Court affirmed the dismissal of the breach of fiduciary duty and
consumer fraud claims. The Appellate Court did, however, reverse in part,
holding that certain putative class members could file class action complaints
against the defendant-group. Although leave to appeal to the Illinois Supreme
Court was sought, the Illinois Supreme Court refused to hear the appeal. The
effect of the denial is that the Appellate Court's opinion remains standing. On
June 15, 1994, the Appellate Court issued its mandate sending the case back to
trial court.
In late January 1995, the plaintiffs filed a Motion to File an Amended
Consolidated Class Action Complaint, which amends the complaint to name McNeil
Partners, L.P. as the successor general partner to Southmark Investment Group.
In February 1995, the plaintiffs filed a Motion for Class Certification. The
amended cases against the defendant-group, and others, are proceeding under the
caption George and Joy Kugler v. I.R.E. Real Estate Income Fund, Jerry and
Barbara Neumann v. Southmark Equity Partners II, Richard and Theresa
Bartoszewski v. Southmark Realty Partners III, and Edward and Rose Weskerna v.
Southmark Realty Partners II.
In September 1995, the court granted the plaintiffs' Motion to File an Amended
Complaint, to Consolidate and for Class Certification. The defendants have
answered the complaint and have plead that the plaintiffs did not give timely
notice of their right to rescind within six months of knowing that right. The
Court ruled on Plaintiff's Motion for Summary Judgment on April 25, 1996 and
entered partial summary judgment, holding in favor of Plaintiffs against the
Partnership, as well as the initial general partners. The Court did not enter
judgment as to the amount of damages, but, instead, set a May 17, 1996 status
hearing and requested both parties to come to an agreement on the amount of
damages. The parties have begun settlement negotiations; however, the
Partnership defendants are still discussing whether to appeal the Summary
Judgment. The ultimate resolution of this litigation could result in a loss of
up to $355,000 in addition to related legal fees. No accrual has been recorded
related to this litigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FINANCIAL CONDITION
- -------------------
The Partnership reported a net loss of $67,077 for the first six months of 1996
as compared to $338,868 for the same period in 1995.
On March 31, 1995, Wyoming Mall was sold to an unrelated third party for a cash
price of $9,250,000. The Partnership had a 50% undivided interest in the assets,
liabilities and operations of Wyoming Mall, owned jointly with McNeil Real
Estate Fund XXI, L.P. The Partnership received net cash proceeds of $738,914
from the sale of the property and recorded a loss on disposition of real estate
of $245,637. The Partnership recorded $256,873 of revenue and $268,759 of
expense during the first six months of 1995 for Wyoming Mall.
<PAGE>
Harbour Club III is part of a four-phase apartment complex located in
Belleville, Michigan. Phases I and II of the complex are owned by partnerships
in which McNeil Partners, L.P. is the general partner; while Phase IV is owned
by University Real Estate Fund 12, Ltd., ("UREF 12"). McREMI had been managing
all four phases of the complex until December 1992, when the property management
agreement between McREMI and UREF 12 was canceled. Additionally, in January
1993, Phase I defaulted on the mortgage loan to HUD and unless a refinancing
agreement can be reached with the lender, the property is subject to
foreclosure. If Phase I is lost to foreclosure, it would be extremely difficult
to operate Phases II and III because the pool and clubhouse are located in
Phase I.
In January 1995, the Partnership was able to repay $220,000 of affiliate
advances and accrued interest. In April 1995, the proceeds from the sale of
Wyoming Mall enabled the Partnership to repay the remaining $713,697 of the
affiliate advances and accrued interest.
RESULTS OF OPERATIONS
- ---------------------
Revenue:
Total Partnership revenues decreased by $39,060 and $261,618 for the three and
six months ended June 30, 1996, respectively, as compared to the same periods of
1995. Rental revenue decreased $1,486 and $225,752 for the three and six months
ended June 30, 1996, respectively, as compared to the same periods in 1995,
primarily due to the sale of Wyoming Mall in March 1995.
The Partnership recorded $38,749 of gain on legal settlement during the first
half of 1995. In May 1995, the Partnership received cash of $29,292 and common
and preferred stock in the reorganized Southmark that was subsequently sold for
$9,457, as full satisfaction of claims previously filed in the Bankruptcy Court.
Expenses:
Total expenses increased $6,832 for the three months and decreased $533,409 for
the six months ended June 30, 1996, as compared to the same periods of 1995,
primarily due to the sale of Wyoming Mall. The effects from this transaction
were declines of $97,610 for interest, $74,606 for depreciation and
amortization, $14,203 for property taxes, $21,368 of personnel expenses, $15,049
for utilities, $11,917 for repairs and maintenance, $17,518 for property
management fees - affiliates, and $16,488 for other property operating expenses.
A $245,637 loss on the sale of Wyoming Mall was recorded in March 1995.
In addition to the sale of Wyoming Mall, other factors affected the level of
expenses reported by Harbor Club III. No interest - affiliates were recorded for
the six months ended June 30, 1996 as compared to $18,568 for the same period of
1995. The sale of Wyoming Mall enabled the Partnership to repay all outstanding
affiliate advances, thereby eliminating affiliate interest expense.
Depreciation expense increased $16,451 and $29,054 for the three months and six
months ended June 30, 1996, respectively, as compared to the same periods of
1995, due to the capital improvements made at Harbour Club III Apartments.
Property tax expense decreased $3,025 and $13,954 for the three months and six
months ended June 30, 1996, respectively, as compared to the same periods of
1995. This decrease is due to the reduction in property tax expense at Harbour
Club III Apartments that occurred from a successful tax appeal.
<PAGE>
General and administrative - affiliates decreased $7,538 and $15,295 for the
three months and the six months ended June 30, 1996, respectively, as compared
to the same periods of 1995. This is attributable to a decrease in the number of
properties, due to the sale of Wyoming Mall, to which the overhead costs are
allocated by McREMI.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership was provided $263,288 of cash by operating activities during the
first six months of 1996 as compared to $94,884 for the same period in 1995.
Cash received from tenants, cash paid to suppliers, cash paid to affiliates,
interest paid, and property taxes paid decreased due to the sale of Wyoming
Mall. Due to the improved cash position from the sale of Wyoming Mall, the
Partnership was able to pay $149,043 of interest due to affiliates during the
first half of 1995. The Partnership received $38,749 of legal settlement
relating to the claims previously filed against Southmark in the Bankruptcy
Court.
Net cash used in investing activities was $147,806 for the first six months of
1996 as compared to $636,241 of cash provided by investing activities for the
same period of 1995. The Partnership received $738,914 of cash proceeds from the
sale of Wyoming Mall on March 31, 1995. Cash used for additions to real estate
totaled $147,806 during the first six months of 1996 as compared to $102,673
during the same period of 1995.
Net cash used in financing activities was $41,382 during the first six months of
1996 as compared to $836,211 for the same period of 1995. Principal payments on
mortgage notes payable decreased due to the retirement of the mortgage note
related to Wyoming Mall. During the first six months of 1995, the improved cash
position enabled the Partnership to repay all outstanding advances from
affiliates of the General Partner.
Short-term liquidity:
At June 30, 1996, the Partnership held $703,847 of cash and cash equivalents, up
$74,100 since December 31, 1995. The balance of cash and cash equivalents can be
considered no more than a minimum level of cash reserves for the remaining
property's operations. Harbour Club III Apartments is expected to provide
sufficient positive cash flow for normal operations and debt service payments
for the remainder of 1996. However, Harbour Club III is in need of major capital
improvements in order to maintain occupancy and rental rates at a level to
continue to support operations and debt service. The necessary capital
improvements will have to be funded from outside sources. No such sources have
been identified. Management is currently seeking additional financing to fund
these improvements, however such financing is not assured. If the property is
unable to obtain additional funds and cannot maintain operations at a level to
support its current debt, the property may ultimately be foreclosed on by the
lender.
McNeil Real Estate Fund XXI, L.P. had advanced funds to the Partnership for
tenant improvements and operations at Wyoming Mall. The advances were unsecured,
due on demand and accrued interest at a rate of prime plus 3 1/2%. In April
1995, the proceeds from the sale of Wyoming Mall were utilized to repay the
advances plus the accrued interest due to McNeil Real Estate Fund XXI, L.P.
<PAGE>
The General Partner has established a revolving credit facility not to exceed
$5,000,000 in the aggregate which is available on a "first-come, first-served"
basis to the Partnership and other affiliated partnerships, if certain
conditions are met. Borrowings under the facility may be used to fund deferred
maintenance, refinancing obligations and working capital needs. There is no
assurance that the Partnership will receive any additional funds under the
facility because no amounts have been reserved for any particular partnership.
As of June 30, 1996, $4,082,159 remained available for borrowing under the
facility; however, additional funds could be available as other partnerships
repay existing borrowings. This commitment will terminate March 26, 1997.
Long-term liquidity:
While the outlook for maintenance of adequate levels of liquidity is adequate in
the short term, should operations deteriorate and present cash resources become
insufficient to fund current needs, the Partnership would require other sources
of working capital. No such sources have been identified. The Partnership has no
established lines of credit from outside sources. Other possible actions to
resolve cash deficiencies include refinancing, deferral of capital expenditures
except where improvements are expected to increase the competitiveness and
marketability of the properties, arranging financing from affiliates or the
ultimate sale of the property. A sale or refinancing is a possibility only, and
there are at present no plans for any such sale or refinancing.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Distributions:
To maintain adequate cash balances of the Partnership, distributions to Current
Income Unit holders were suspended in 1988. There have been no distributions to
Growth/Shelter Units holders. Distributions to Unit holders will remain
suspended for the foreseeable future. The General Partner will continue to
monitor the cash reserves and working capital needs of the Partnership to
determine when cash flows will support distributions to the Unit holders.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
1) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et
al. (Case #92-06560-A). This suit was filed on behalf of the Partnership
and other affiliated partnerships (the "Affiliated Partnerships") on May
26, 1992, in the 14th Judicial District Court of Dallas County. The
petition sought recovery against the Partnership's former auditors, Ernst &
Young, for negligence and fraud in failing to detect and/or report
overcharges of fees/expenses by Southmark Corporation ("Southmark"), the
former general partner. The former auditors initially asserted
counterclaims against the Affiliated Partnerships based on alleged
fraudulent misrepresentations made to the auditors by the former management
of the Affiliated Partnerships (Southmark) in the form of client
representation letters executed and delivered to the auditors by Southmark
management. The counterclaims sought recovery of attorneys' fees and costs
incurred in defending this action. The counterclaims were later dismissed
on appeal, as discussed below.
<PAGE>
The trial court granted summary judgment against the Partnership based on
the statute of limitations; however, on appeal, the Dallas Court of Appeals
reversed the trial court and remanded for trial the Affiliated
Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court
denied Ernst & Young's application for writ of error on January 11, 1996.
The Partnership is continuing to pursue vigorously its claims against Ernst
& Young. Trial is set for the week of October 14, 1996; however, the final
outcome of this litigation cannot be determined at this time.
2) Martha Hess, et al. v. Southmark Realty Partners II, Ltd. (presently known
as McNeil Real Estate Fund XXII, L.P.), Southmark Income Investors, Ltd,
Southmark Equity Partners, Ltd., Southmark Realty Partners III, Ltd., and
Southmark Equity Partners II, Ltd., et al. ("Hess"); Kotowski v. Southmark
Equity Partners, Ltd. and Donald Arceri v. Southmark Income Investors, Ltd.
These cases were previously pending in the Illinois Appellate Court for the
First District ("Appellate Court"), as consolidated Case No. 90-107.
Consolidated with these cases are an additional 14 matters against
unrelated partnership entities. The Hess case was filed on May 20, 1988, by
Martha Hess, individually and on behalf of a putative class of those
similarly situated. The original, first, second and third amended
complaints in Hess sought rescission, pursuant to the Illinois Securities
Act, of over $2.7 million of principal invested in five Southmark (now
McNeil) partnerships, and other relief including damages for breach of
fiduciary duty and violation of the Illinois Consumer Fraud and Deceptive
Business Practices Act. The original, first, second and third amended
complaints in Hess were dismissed against the defendant-group because the
Appellate Court held that they were not the proper subject of a class
action complaint. Hess was, thereafter, amended a fourth time to state
causes of action against unrelated partnership entities. Hess went to
judgment against that unrelated entity and the judgment, along with the
prior dismissal of the class action, was appealed. The Hess appeal was
decided by the Appellate Court during 1992. The Appellate Court affirmed
the dismissal of the breach of fiduciary duty and consumer fraud claims.
The Appellate Court did, however, reverse in part, holding that certain
putative class members could file class action complaints against the
defendant-group. Although leave to appeal to the Illinois Supreme Court was
sought, the Illinois Supreme Court refused to hear the appeal. The effect
of the denial is that the Appellate Court's opinion remains standing. On
June 15, 1994, the Appellate Court issued its mandate sending the case back
to trial court.
In late January 1995, the plaintiffs filed a Motion to File an Amended
Consolidated Class Action Complaint, which amends the complaint to name
McNeil Partners, L.P. as the successor general partner to Southmark
Investment Group. In February 1995, the plaintiffs filed a Motion for
Class Certification. The amended cases against the defendant-group, and
others, are proceeding under the caption George and Joy Kugler v. I.R.E.
Real Estate Income Fund, Jerry and Barbara Neumann v. Southmark Equity
Partners II, Richard and Theresa Bartoszewski v. Southmark Realty Partners
III, and Edward and Rose Weskerna v. Southmark Realty Partners II.
In September 1995, the court granted the plaintiffs' Motion to File an
Amended Complaint, to Consolidate and for Class Certification. The
defendants have answered the complaint and have plead that the plaintiffs
did not give timely notice of their right to rescind within six months of
knowing that right. The Court ruled on Plaintiff's Motion for Summary
Judgment on April 25, 1996 and entered partial summary judgment, holding in
favor of Plaintiffs against the Partnership, as well as the initial general
<PAGE>
partners. The Court did not enter judgment as to the amount of damages,
but, instead, set a May 17, 1996 status hearing and requested both parties
to come to an agreement on the amount of damages. The parties have begun
settlement negotiations; however, the Partnership defendants are still
discussing whether to appeal the Summary Judgment. The ultimate resolution
of this litigation could result in a loss of up to $355,000 in addition to
related legal fees. No accrual has been recorded related to this
litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits.
Exhibit
Number Description
------- -----------
4. Amended and Restated Limited Partnership
Agreement dated March 26, 1992. (Incorpo-
rated by reference to the Current Report of
the Registrant on Form 8-K dated March 26,
1992, as filed on April 9, 1992).
11. Statement regarding computation of Net
Income (Loss) per Thousand Limited Partner-
ship Units: Net income (loss) per thousand
limited partnership units is computed by
dividing net income (loss) allocated to
the limited partners by the weighted average
number of limited partnership units out-
standing expressed in thousands. Per unit
information has been computed based on
19,818 and 19,826 weighted average Current
Income Units (in thousands) outstanding in
1996 and 1995, respectively, and 13,358
and 13,383 weighted average Growth/Shelter
Units (in thousands) outstanding in 1996 and
1995, respectively.
27. Financial Data Schedule for the quarter
ended June 30, 1996.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during
the quarter ended June 30, 1996.
<PAGE>
MCNEIL REAL ESTATE FUND XXII, L.P.
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:
McNEIL REAL ESTATE FUND XXII, L.P.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
August 14, 1996 By: /s/ Donald K. Reed
- ---------------------------- ----------------------------------------
Date Donald K. Reed
President and Chief Executive Officer
August 14, 1996 By: /s/ Ron K. Taylor
- ---------------------------- ----------------------------------------
Date Ron K. Taylor
Acting Chief Financial Officer of
McNeil Investors, Inc.
August 14, 1996 By: /s/ Carol A. Fahs
- ---------------------------- ----------------------------------------
Date Carol A. Fahs
Chief Accounting Officer of McNeil Real
Estate Management, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 703,847
<SECURITIES> 0
<RECEIVABLES> 6,793
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,371,066
<DEPRECIATION> (4,927,686)
<TOTAL-ASSETS> 6,416,657
<CURRENT-LIABILITIES> 0
<BONDS> 6,003,743
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,416,657
<SALES> 1,116,301
<TOTAL-REVENUES> 1,132,126
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 907,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291,506
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (67,077)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,077)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
