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 September 30, 1996
-----------------------------------------------------
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 0-15446
--------
MCNEIL REAL ESTATE FUND XXV, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0120335
- --------------------------------------------------------------------------------
(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 (972) 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 XXV, L.P.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- --------------
ASSETS
- ------
Real estate investments:
<S> <C> <C>
Land..................................................... $ 5,524,462 $ 5,524,462
Buildings and improvements............................... 65,365,015 64,330,457
-------------- -------------
70,889,477 69,854,919
Less: Accumulated depreciation and amortization......... (31,644,507) (29,234,446)
-------------- -------------
39,244,970 40,620,473
Cash and cash equivalents................................... 4,755,551 3,987,381
Cash segregated for security deposits....................... 312,525 300,223
Note receivable............................................. 344,225 344,225
Accounts receivable, net of allowance for doubtful
accounts of $714,050 at September 30, 1996 and
December 31, 1995........................................ 743,709 802,426
Escrow deposits............................................. 152,378 979,938
Deferred borrowing costs, net of accumulated
amortization of $74,472 and $67,623 at September
30, 1996 and December 31, 1995, respectively............ 244,278 251,127
Prepaid expenses and other assets........................... 326,073 438,148
-------------- -------------
$ 46,123,709 $ 47,723,941
============== =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------
Mortgage note payable....................................... $ 7,381,507 $ 7,381,507
Accounts payable and accrued expenses....................... 155,206 694,624
Accrued interest............................................ 379,930 686,502
Accrued property taxes...................................... 378,913 450,530
Payable to affiliates....................................... 64,618 98,407
Payable to limited partners................................. 1,771,535 -
Land lease obligation....................................... 254,831 277,132
Deferred gain............................................... 344,225 344,225
Security deposits and deferred rental revenue............... 340,547 326,032
-------------- -------------
11,071,312 10,258,959
-------------- -------------
Partners' equity (deficit):
Limited partners - 84,000,000 limited partnership
units authorized; 83,894,648 limited partnership
units issued and outstanding at September 30, 1996
and December 31, 1995.................................. 35,489,906 37,898,581
General Partner.......................................... (437,509) (433,599)
-------------- -------------
35,052,397 37,464,982
-------------- -------------
$ 46,123,709 $ 47,723,941
============== =============
</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 XXV, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- --------------- -------------- --------------
Revenue:
<S> <C> <C> <C> <C>
Rental revenue................ $ 2,345,344 $ 2,392,656 $ 6,966,508 $ 6,681,341
Interest...................... 60,740 53,396 179,047 154,050
Gain on legal settlement...... - - - 96,731
------------- ------------- ------------- -------------
Total revenue............... 2,406,084 2,446,052 7,145,555 6,932,122
------------- ------------- ------------- -------------
Expenses:
Interest...................... 214,469 202,256 645,949 614,570
Depreciation and
amortization................ 809,493 889,789 2,410,061 2,550,821
Property taxes................ 194,787 160,402 625,825 582,730
Personnel costs............... 202,226 186,184 625,073 543,507
Utilities..................... 264,272 281,524 630,331 644,555
Repairs and maintenance....... 240,343 299,979 764,067 895,662
Property management
fees - affiliates........... 132,040 132,964 402,121 400,327
Other property operating
expenses.................... 193,459 193,651 579,986 630,957
General and administrative.... 97,899 258,683 175,198 314,456
General and administrative -
affiliates.................. 216,371 229,385 677,988 683,633
------------- ------------- ------------- -------------
Total expenses.............. 2,565,359 2,834,817 7,536,599 7,861,218
------------- ------------- ------------- -------------
Net loss......................... $ (159,275) $ (388,765) $ (391,044) $ (929,096)
============= ============= ============= =============
Net loss allocable
to limited partners........... $ (157,683) $ (384,877) $ (387,134) $ (919,805)
Net loss allocable
to General Partner............ (1,592) (3,888) (3,910) (9,291)
------------- ------------- ------------- -------------
Net loss......................... $ (159,275) $ (388,765) $ (391,044) $ (929,096)
============= ============= ============= =============
Net loss per thousand
limited partnership units..... $ (1.88) $ (4.59) $ (4.61) $ (10.96)
============= ============= ============= =============
Distributions per thousand
limited partnership units..... $ 2.98 $ - $ 2.98 $ -
============= ============= ============= ============
</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 XXV, L.P.
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
(Unaudited)
For the Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Equity (Deficit)
--------------- -------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1994.............. $ (374,160) $ 43,783,028 $ 43,408,868
Net loss.................................. (9,291) (919,805) (929,096)
------------- ------------- -------------
Balance at September 30, 1995............. $ (383,451) $ 35,489,906 $ 35,052,397
============= ============= =============
Balance at December 31, 1995.............. $ (433,599) $ 37,898,581 $ 37,464,982
Rescission of 1,009,777 limited
partnership units..................... - (1,771,535) (1,771,535)
Net loss.................................. (3,910) (387,134) (391,044)
Distributions............................. - (250,006) (250,006)
------------- ------------- -------------
Balance at September 30, 1996............. $ (437,509) $ 35,489,906 $ 35,052,397
============= ============= =============
</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 XXV, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Increase in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1996 1995
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from tenants........................ $ 7,033,285 $ 6,965,389
Cash paid to suppliers............................ (2,460,014) (2,949,167)
Cash paid to affiliates........................... (1,113,898) (1,092,624)
Interest received................................. 179,047 154,050
Interest paid..................................... (945,672) (464,424)
Property taxes paid and escrowed.................. (617,713) (880,304)
Cash received from legal settlement............... - 96,731
--------------- --------------
Net cash provided by operating activities............ 2,075,035 1,829,651
--------------- --------------
Cash flows from investing activities:
Additions to real estate investments.............. (1,034,558) (1,221,365)
--------------- --------------
Cash flows from financing activities:
Payments on capitalized land lease
obligation...................................... (22,301) (30,224)
Distributions paid................................ (250,006) -
--------------- --------------
Net cash used in financing activities................ (272,307) (30,224)
--------------- --------------
Net increase in cash and cash equivalents............ 768,170 578,062
Cash and cash equivalents at beginning of
period............................................ 3,987,381 3,125,937
--------------- --------------
Cash and cash equivalents at end of period........... $ 4,755,551 $ 3,703,999
=============== ==============
</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 XXV, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Reconciliation of Net Loss to Net Cash Provided by
Operating Activities
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Net loss............................................. $ (391,044) $ (929,096)
-------------- --------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 2,410,061 2,550,821
Amortization of deferred borrowing costs.......... 6,849 6,849
Amortization of deferred gain..................... - (4,115)
Changes in assets and liabilities:
Cash segregated for security deposits........... (12,302) (10,038)
Accounts receivable, net........................ 58,717 282,429
Escrow deposits................................. 827,560 208,556
Prepaid expenses and other assets............... 112,075 (68,138)
Accounts payable and accrued expenses........... (539,418) 146,153
Accrued interest................................ (306,572) 143,297
Accrued property taxes.......................... (71,617) (519,843)
Payable to affiliates........................... (33,789) (8,664)
Security deposits and deferred rental
revenue....................................... 14,515 31,440
--------------- --------------
Total adjustments............................. 2,466,079 2,758,747
--------------- --------------
Net cash provided by operating activities............ $ 2,075,035 $ 1,829,651
=============== ==============
</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 XXV, L.P.
Notes to Financial Statements
September 30, 1996
(Unaudited)
NOTE 1.
- -------
McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as
Southmark Equity Partners II, Ltd., was organized on February 15, 1985 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 nine months ended September 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 XXV, L.P., c/o McNeil Real Estate Management, Inc.,
Investor Services, 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240.
NOTE 3.
- -------
The Partnership pays property management fees equal to 5% of the gross rental
receipts for its residential property and 6% of gross rental receipts for its
commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an
affiliate of the General Partner, for providing property management services for
the Partnership's residential and commercial properties and leasing services for
its residential properties. McREMI may also choose to provide leasing services
for the Partnership's commercial properties, in which case McREMI will receive
property management fees from such commercial properties equal to 3% of the
property's gross rental receipts plus leasing commissions based on the
prevailing market rate for such services where the property is located.
The Partnership reimburses McREMI for its costs, including overhead, of
administering the Partnership's affairs.
<PAGE>
The Partnership is paying 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 properties 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.
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner or its affiliates are as follows:
Nine Months Ended
September 30,
--------------------------
1996 1995
----------- -----------
Property management fees.................... $ 402,121 $ 400,327
Charged to general and administrative
expense:
Partnership administration............... 175,328 216,369
Asset management fee..................... 502,660 467,264
---------- ----------
$ 1,080,109 $ 1,083,960
========== ==========
Payable to affiliates at September 30, 1996 and December 31, 1995 consisted
primarily of unpaid property management fees, Partnership general and
administrative expenses and asset management fees and are due and payable from
current operations.
NOTE 4.
- -------
Martha Hess, et al. v. Southmark Equity Partners II, Ltd. (presently known as
McNeil Real Estate Fund XXV, L.P.), Southmark Income Investors, Ltd, Southmark
Equity Partners, Ltd., Southmark Realty Partners III, Ltd., and Southmark Realty
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
<PAGE>
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. Summary judgment against
McNeil Partners, L.P., as the successor general partner, was not sought.
On October 26, 1996, the court entered judgment against the Partnership in the
amount of $1,768,048, plus post-judgment interest. On October 30, 1996, the
Partnership paid the plaintiffs $1,771,535 in exchange for a full release of the
Partnership and McNeil Partners, L.P. However, the amount of legal fees remains
to be settled and could result in an additional judgment of $900,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FINANCIAL CONDITION
- -------------------
There has been no significant change in the operations of the Partnership's
properties since December 31, 1995. The Partnership reported a net loss of
$391,044 for the first nine months of 1996 as compared to a net loss of $929,096
for the first nine months of 1995. Revenue in 1996 increased to $7,145,555 from
$6,932,122 in 1995, while expenses dropped to $7,536,599 from $7,861,218.
Net cash provided by operating activities was $2,075,035 for the nine months
ended September 30, 1996, a change from $1,829,651 provided during the same
period in 1995. The Partnership expended $1,034,558 for capital improvements and
$22,301 for payments on the capitalized land lease obligation. After
distributions of $250,006 to the limited partners, cash and cash equivalents
totaled $4,755,551 at September 30, 1996, a net increase of $768,170 from the
balance at December 31, 1995.
<PAGE>
Harbour Club I Apartments has continued to experience financial difficulties.
The cash flow from operations of the property has not been sufficient to fund
necessary capital improvements and to make the required monthly debt service
payments. Effective January 1, 1993, the Partnership ceased making regularly
scheduled debt service and escrow payments. In lieu of the aforementioned
payments, the Partnership is funding debt service with the excess cash flow of
the property. The Partnership has been notified that the mortgage note payable
is in default and that the servicing agent has assigned the mortgage to the
Department of Housing and Urban Development ("HUD"). If the Partnership is
unable to successfully cure the default, the mortgagee could declare the entire
indebtedness due and proceed with foreclosure on the property or pursue other
actions such as gaining control of the property or placing it in receivership.
As of September 30, 1996, no steps have been taken toward foreclosure.
RESULTS OF OPERATIONS
- ---------------------
Revenue:
Total Partnership revenue decreased by $39,968 and increased by $213,433 for the
three and nine months ended September 30, 1996, respectively, as compared to the
same periods in 1995, as discussed below.
Rental revenue for the three and nine months ended September 30, 1996 decreased
by $47,312 and increased $285,167, respectively, as compared to the three and
nine months ended September 30, 1995. The overall increase was mainly due to
increases of approximately $171,000 and $151,000 at Century Park and Kellogg
Building, respectively, during the first nine months of 1996. Occupancy at
Century Park increased from 93% at the end of September 1995 to 100% at the end
of September 1996. Kellogg Building had an occupancy rate in the low 80% range
during the first part of 1995 until a tenant began occupying a large amount of
space in the second quarter of 1995. Kellogg Building had an occupancy rate of
92% at September 30, 1996. These increases were partially offset by a decrease
in rental revenue at Northwest Plaza due to a termination fee being paid by a
tenant in the third quarter of 1995.
Interest income earned on short-term investments of cash and cash equivalents
increased by $7,344 and $24,997 for the three and nine months ended September
30, 1996, respectively, as compared to the same periods in 1995. The increase
was due to greater average cash balances invested in these accounts during the
first nine months of 1996. The Partnership held $4.8 million of cash and cash
equivalents at September 30, 1996 as compared to $3.7 million at September 30,
1995.
The Partnership received cash and common and preferred stock in the reorganized
Southmark in settlement of its bankruptcy claims against Southmark. The
Partnership recognized a $96,731 gain in the second quarter of 1995 as a result
of this settlement.
Expenses:
Total expenses decreased by $269,458 and $324,619 for the three and nine months
ended September 30, 1996, respectively, as compared to the same periods in 1995.
The decreases were primarily due to a decrease in repairs and maintenance and
general and administrative expenses, partially offset by an increase in
personnel costs, as discussed below.
<PAGE>
Personnel costs increased by $16,042 and $81,566 for the three and nine months
ended September 30, 1996, respectively, in relation to the comparable periods in
1995. The increases were mainly due to the addition of two maintenance
technicians at Fidelity Plaza office building and the addition of temporary
maintenance technicians at Northwest Plaza Shopping Center.
Repairs and maintenance expense decreased by $59,636 and $131,595 for the three
and nine months ended September 30, 1996, respectively, in relation to the same
periods in 1995. The decrease was mainly due to a decline in contracted repairs
expense at Fidelity Plaza, the result of the hiring of two maintenance
technicians. In addition, Fidelity Plaza experienced a decline in light bulbs
and fixtures expense in the first nine months of 1996.
For the three and nine months ended September 30, 1996, general and
administrative expenses decreased by $160,784 and $139,258, respectively. The
decrease was mainly due to costs incurred in the third quarter of 1995 relating
to evaluation and dissemination of information regarding an unsolicited tender
offer. The Partnership anticipates incurring such costs in the fourth quarter of
1996 in response to an additional unsolicited tender offer as discussed in Item
5 - Other Information.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership's primary source of cash flows is from operating activities
which generated $2,075,035 of cash in the first nine months of 1996 as compared
to $1,829,651 for the same period in 1995. The increase in cash provided by
operating activities in 1996 was mainly the result of an increase in cash
received from tenants, as well as a decline in cash paid to suppliers. See
discussion of increase in rental revenue and decline in Partnership expenses
above. Interest paid increased by $481,248 during the first nine months of 1996
as compared to the first nine months of 1995, mainly since the mortgagee of
Harbour Club I applied certain escrow account balances to reduce accrued
interest. The Partnership ceased making regularly scheduled debt service and
escrow payments, and is funding debt service with the excess cash flow of the
property.
The Partnership expended $1,034,558 and $1,221,365 for additions to its real
estate investments during the nine months ended September 30, 1996 and 1995,
respectively. During 1995, a greater amount was spent for improvements for a
large new tenant at Kellogg Building. In addition, extensive lobby and courtyard
improvements were completed in 1995 at Fidelity Plaza office building.
The Partnership distributed $250,006 to the limited partners in the third
quarter of 1996. No such distributions were paid to the limited partners in
1995.
As discussed in Item 1, Note 4, 1,009,777 limited partnership units were
rescinded and $1,771,535 was paid to the limited partners subsequent to
September 30, 1996.
Short-term liquidity:
At September 30, 1996, the Partnership held cash and cash equivalents of
$4,755,551. This balance provides a reasonable level of working capital for the
Partnership's immediate needs in operating its properties.
<PAGE>
For the remainder of 1996, Partnership properties are expected to provide
positive cash flow from operations after payment of debt service and capital
improvements. Only one property, Harbour Club I Apartments, is encumbered with
mortgage debt and another property, Fidelity Plaza, is encumbered with lease
obligations. The Partnership has budgeted $1,906,859 for necessary capital
improvements for all properties in 1996 which is expected to be funded from
available cash reserves or from operations of the properties. An escrow account
restricted to the funding of priority capital needs is held by the lender for
Harbour Club I in the amount of $104,589, which is included in escrow deposits
on the Balance Sheets. The present cash balance is believed to provide an
adequate reserve for property operations.
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 funds under the facility because no amounts are
reserved for any particular partnership. As of September 30, 1996, $4,082,195
remained available for borrowing under the facility; however, additional funds
could become available as other partnerships repay existing borrowings. This
commitment will terminate on March 26, 1997.
Long-term liquidity:
While the present outlook for the Partnership's liquidity is favorable, market
conditions may change and property operations can deteriorate. In that event,
the Partnership would require other sources of working capital. No such sources
have been identified and the Partnership has no established lines of credit.
Other possible actions to resolve working capital deficiencies include
refinancing or renegotiating terms of existing loans, deferring major capital
expenditures on Partnership properties except where improvements are expected to
enhance the competitiveness or marketability of the properties, or arranging
working capital support from affiliates. No affiliate support has been required
in the past, and there is no assurance that support would be provided in the
future, since neither the General Partner nor any affiliates have any obligation
in this regard.
The Partnership has determined to begin an orderly liquidation of all the
Partnership's assets. Although there can be no assurance as to the timing of any
liquidation, it is anticipated that such liquidation would result in
distributions to the limited partners of the cash proceeds from the sale of the
Partnership's properties, subject to cash reserve requirements, as they are sold
with the last property disposition before December 1999 followed by a
dissolution of the Partnership.
<PAGE>
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.
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 anticipated to be set for early December 1996; however,
the final outcome of this litigation cannot be determined at this time.
2) Martha Hess, et al. v. Southmark Equity Partners II, Ltd. (presently known
as McNeil Real Estate Fund XXV, L.P.), Southmark Income Investors, Ltd,
Southmark Equity Partners, Ltd., Southmark Realty Partners III, Ltd., and
Southmark Realty 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.
<PAGE>
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. Summary judgment against McNeil Partners, L.P., as the successor
general partner, was not sought.
On October 26, 1996, the court entered judgment against the Partnership in
the amount of $1,768,048, plus post-judgment interest. On October 30, 1996,
the Partnership paid the plaintiffs $1,771,535 in exchange for a full
release of the Partnership and McNeil Partners, L.P. However, the amount of
legal fees remains to be settled and could result in an additional judgment
of $900,000.
3) McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund V, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real
Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P. McNeil Real Estate
Fund XXIV, L.P., and McNeil Real Estate Fund XXV, L.P. v. High River
Limited Partnership, Riverdale Investors Corp., Inc., Carl C. Icahn, and
Unicorn Associates Corporation - United States District Court for the
Central District of California, Case No. 96-5680SVW.
On August 12, 1996, High River Limited Partnership ("High River"), a
partnership controlled by Carl C. Icahn, sent a letter to the partnerships
referenced above demanding lists of the names, current residences or
business addresses and certain other information concerning the unitholders
of such partnerships. On August 19, 1996, these partnerships commenced the
above action seeking, among other things, to declare that such partnerships
are not required to provide High River with a current list of unitholders
on the grounds that the defendants commenced a tender offer in violation of
federal securities laws by filing certain Schedule 13D Amendments on August
5, 1996.
<PAGE>
On October 17, 1996, the presiding judge denied the partnerships' requests
for a permanent and preliminary injunction to enjoin High River's tender
offers and granted the defendants' request for an order directing the
partnerships to turn over current lists of unitholders to High River
forthwith. On October 24, 1996, the partnerships delivered the unitholder
lists to High River.
ITEM 5. OTHER INFORMATION
- ------- -----------------
On September 20, 1996, High River announced that it had commenced a tender offer
for any and all units of the Partnership at $0.252 per unit (the original offer
price of $0.255 was reduced by the August 1996 distributions to unitholders of
$0.003 per unit). The tender was originally due to expire October 18, 1996,
however, this offer has been extended until November 22, 1996.
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 (incorporated
by reference to the Current Report of the
registrant on Form 8-K dated March 26, 1992,
as filed on April 9, 1992).
4.1 Amendment No. 1 to the Amended and Restated
Limited Partnership Agreement of McNeil Real
Estate Fund XXV, L.P. dated June 1995
(incorporated by reference to the Quarterly
Report of the registrant on form 10-Q for
the period ended June 30, 1995, as filed on
August 14, 1995).
11. Statement regarding computation of Net Loss
per Thousand Limited Partnership Units: Net
loss per thousand limited partnership units
is computed by dividing net loss allocated
to the limited partners by the weighted
average number of limited partnership units
outstanding expressed in thousands. Per
thousand unit information has been computed
based on 83,895 weighted average thousand
limited partnership units outstanding in
1996 and 1995.
27. Financial Data Schedule for the quarter
ended September 30, 1996.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during
the quarter ended September 30, 1996.
<PAGE>
MCNEIL REAL ESTATE FUND XXV, 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 XXV, L.P.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
November 14, 1996 By: /s/ Donald K. Reed
- ----------------- ----------------------------------------
Date Donald K. Reed
President and Chief Executive Officer
November 14, 1996 By: /s/ Ron K. Taylor
- ----------------- ----------------------------------------
Date Ron K. Taylor
Acting Chief Financial Officer of
McNeil Investors, Inc.
November 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,755,551
<SECURITIES> 0
<RECEIVABLES> 1,457,759
<ALLOWANCES> (714,050)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 70,889,477
<DEPRECIATION> (31,644,507)
<TOTAL-ASSETS> 46,123,709
<CURRENT-LIABILITIES> 0
<BONDS> 7,381,507
<COMMON> 0
0
0
<OTHER-SE> 35,052,397
<TOTAL-LIABILITY-AND-EQUITY> 46,123,709
<SALES> 6,966,508
<TOTAL-REVENUES> 7,145,555
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,890,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 645,949
<INCOME-PRETAX> (391,044)
<INCOME-TAX> 0
<INCOME-CONTINUING> (391,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (391,044)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
