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
--------------------------------------------------------
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
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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 (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 XXV, 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..................................................... $ 5,524,462 $ 5,524,462
Buildings and improvements............................... 65,207,738 64,330,457
-------------- -------------
70,732,200 69,854,919
Less: Accumulated depreciation and amortization......... (30,835,014) (29,234,446)
-------------- -------------
39,897,186 40,620,473
Cash and cash equivalents................................... 4,777,995 3,987,381
Cash segregated for security deposits....................... 301,988 300,223
Note receivable............................................. 344,225 344,225
Accounts receivable, net of allowance for doubtful
accounts of $714,050 at June 30, 1996 and
December 31, 1995........................................ 711,719 802,426
Escrow deposits............................................. 368,280 979,938
Deferred borrowing costs, net of accumulated
amortization of $72,189 and $67,623 at June 30,
1996 and December 31, 1995, respectively................. 246,561 251,127
Prepaid expenses and other assets........................... 372,378 438,148
-------------- -------------
$ 47,020,332 $ 47,723,941
============== =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------
Mortgage note payable....................................... $ 7,381,507 $ 7,381,507
Accounts payable and accrued expenses....................... 730,531 694,624
Accrued interest............................................ 328,407 686,502
Accrued property taxes...................................... 326,352 450,530
Payable to affiliates....................................... 76,582 98,407
Land lease obligation....................................... 265,297 277,132
Deferred gain............................................... 344,225 344,225
Security deposits and deferred rental revenue............... 334,218 326,032
-------------- -------------
9,787,119 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 June 30, 1996
and December 31, 1995.................................. 37,669,130 37,898,581
General Partner.......................................... (435,917) (433,599)
-------------- -------------
37,233,213 37,464,982
-------------- -------------
$ 47,020,332 $ 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 Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
Revenue:
<S> <C> <C> <C> <C>
Rental revenue................ $ 2,311,772 $ 2,227,363 $ 4,621,164 $ 4,288,685
Interest...................... 62,177 53,153 118,307 100,654
Gain on legal settlement...... - 96,731 - 96,731
------------- ------------- ------------- -------------
Total revenue............... 2,373,949 2,377,247 4,739,471 4,486,070
------------- ------------- ------------- -------------
Expenses:
Interest...................... 215,344 205,888 431,480 412,314
Depreciation and
amortization................ 729,947 804,535 1,600,568 1,661,032
Property taxes................ 192,537 237,294 431,038 422,328
Personnel costs............... 192,272 158,022 422,847 357,323
Utilities..................... 178,783 175,300 366,059 363,031
Repairs and maintenance....... 285,166 286,273 523,724 595,683
Property management
fees - affiliates........... 141,952 145,980 270,081 267,363
Other property operating
expenses.................... 192,741 229,385 386,527 437,306
General and administrative.... 34,908 30,903 77,299 55,773
General and administrative -
affiliates.................. 234,061 230,243 461,617 454,248
------------- ------------- ------------- -------------
Total expenses.............. 2,397,711 2,503,823 4,971,240 5,026,401
------------- ------------- ------------- -------------
Net loss......................... $ (23,762) $ (126,576) $ (231,769) $ (540,331)
============= ============ ============= =============
Net loss allocable
to limited partners........... $ (23,524) $ (125,311) $ (229,451) $ (534,928)
Net loss allocable
to General Partner............ (238) (1,265) (2,318) (5,403)
------------- ------------- ------------- -------------
Net loss......................... $ (23,762) $ (126,576) $ (231,769) $ (540,331)
============= ============ ============= =============
Net loss per thousand
limited partnership units..... $ (.28) $ (1.49) $ (2.73) $ (6.38)
============= ============ ============= =============
</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 Six Months Ended June 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.................................. (5,403) (534,928) (540,331)
------------- ------------- -------------
Balance at June 30, 1995.................. $ (379,563) $ 43,248,100 $ 42,868,537
============= ============== =============
Balance at December 31, 1995.............. $ (433,599) $ 37,898,581 $ 37,464,982
Net loss.................................. (2,318) (229,451) (231,769)
------------- ------------- -------------
Balance at June 30, 1996.................. $ (435,917) $ 37,669,130 $ 37,233,213
============= ============= =============
</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>
Six Months Ended
June 30,
-----------------------------------------
1996 1995
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from tenants........................ $ 4,719,929 $ 4,621,099
Cash paid to suppliers............................ (1,089,637) (1,845,969)
Cash paid to affiliates........................... (753,523) (735,040)
Interest received................................. 118,307 100,654
Interest paid..................................... (785,009) (327,449)
Property taxes paid and escrowed.................. (530,337) (697,133)
Cash received from legal settlement............... - 96,731
--------------- --------------
Net cash provided by operating activities............ 1,679,730 1,212,893
--------------- --------------
Cash flows from investing activities:
Additions to real estate investments.............. (877,281) (687,020)
--------------- --------------
Cash flows from financing activities:
Payments on capitalized land lease
obligation...................................... (11,835) (19,895)
--------------- --------------
Net increase in cash and cash equivalents............ 790,614 505,978
Cash and cash equivalents at beginning of
period............................................ 3,987,381 3,125,937
--------------- --------------
Cash and cash equivalents at end of period........... $ 4,777,995 $ 3,631,915
=============== ==============
</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>
Six Months Ended
June 30,
-----------------------------------------
1996 1995
----------------- ----------------
<S> <C> <C>
Net loss............................................. $ (231,769) $ (540,331)
--------------- --------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 1,600,568 1,661,032
Amortization of deferred borrowing costs.......... 4,566 4,567
Changes in assets and liabilities:
Cash segregated for security deposits........... (1,765) (7,827)
Accounts receivable, net........................ 90,707 360,251
Escrow deposits................................. 611,658 109,224
Prepaid expenses and other assets............... 65,770 (59,359)
Accounts payable and accrued expenses........... 35,907 15,739
Accrued interest................................ (358,095) 80,298
Accrued property taxes.......................... (124,178) (416,130)
Payable to affiliates........................... (21,825) (13,429)
Security deposits and deferred rental
revenue....................................... 8,186 18,858
--------------- --------------
Total adjustments............................. 1,911,499 1,753,224
--------------- --------------
Net cash provided by operating activities............ $ 1,679,730 $ 1,212,893
=============== ==============
</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
June 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 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 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:
Six Months Ended
June 30,
--------------------------
1996 1995
---------- ---------
Property management fees................... $ 270,081 $ 267,363
Charged to general and administrative
expense:
Partnership administration.............. 126,773 149,804
Asset management fee.................... 334,844 304,444
--------- --------
$ 731,698 $ 721,611
========= ========
Payable to affiliates at June 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
unrelated partnership entities. Hess went to judgment against that unrelated
entity and the judgment, along with the prior dismissal of the class action, was
<PAGE>
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
Judgments. The ultimate resolution of this litigation could result in a loss of
up to $1.8 million 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
- -------------------
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
$231,769 for the first six months of 1996 as compared to a net loss of $540,331
for the first six months of 1995. Revenue in 1996 increased to $4,739,471 from
$4,486,070 in 1995, while expenses dropped to $4,971,240 from $5,026,401.
Net cash provided by operating activities was $1,679,730 for the six months
ended June 30, 1996, a change from $1,212,893 provided during the same period in
1995. The Partnership expended $877,281 for capital improvements and $11,835 for
payments on the capitalized land lease obligation. The balance of cash and cash
equivalents increased to $4,777,995 at June 30, 1996, a net increase of $790,614
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 June 30, 1996, no steps have been taken toward foreclosure.
RESULTS OF OPERATIONS
- ---------------------
Revenue:
Total Partnership revenue decreased $3,298 and increased $253,401 for the three
and six months ended June 30, 1996, respectively, as compared to the same
periods in 1995.
Rental revenue for the three and six months ended June 30, 1996 increased by
$84,409 and $332,479, respectively, as compared to the three and six months
ended June 30, 1995. The increase was mainly due to increases of approximately
$134,000, $127,000, and $34,000 at Century Park, Kellogg Building and Fidelity
Plaza, respectively, during the first half of 1996. Occupancy at Century Park
increased from 86% at the end of June 1995 to 100% at the end of June 1996.
Kellogg Building had an occupancy rate in the mid 90% range during the first
half of 1996, while the rate was in low 80% range during most of the first half
of 1995. The increase at Fidelity Plaza was mainly due to the receipt of $29,000
in lease termination fees in 1996.
Interest income earned on short-term investments of cash and cash equivalents
increased by $9,024 and $17,653 for the three and six months ended June 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
six months of 1996. The Partnership held $4.8 million of cash and cash
equivalents at June 30, 1996 as compared to $3.6 million at June 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 $106,112 and $55,161 for the three and six months
ended June 30, 1996, respectively, as compared to the same periods in 1995. The
decrease was primarily due to a decrease in repairs and maintenance and other
property operating expenses, partially offset by an increase in personnel costs,
as discussed below.
<PAGE>
Personnel costs increased by $34,250 and $65,524 for the three and six months
ended June 30, 1996, respectively, in relation to the comparable periods in
1995. The increase was mainly due to the addition of two maintenance technicians
at Fidelity Plaza office building.
Repairs and maintenance expense decreased by $1,107 and $71,959 for the three
and six months ended June 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 half of 1996.
Other property operating expenses decreased $36,644 and $50,779 for the three
and six months ended June 30, 1996, respectively, as compared to the same
periods in the prior year. The decrease was due to a decrease in bad debts at
Northwest Plaza, Fidelity Plaza, and Harbour Club I. Also, the decrease is
attributable to a decrease in telephone and answering service expense at Kellogg
Building.
For the three and six months ended June 30, 1996, general and administrative
expenses increased by $4,005 and $21,526, respectively. The increase was due to
costs incurred by the Partnership to defend class action litigation.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership's primary source of cash flows is from operating activities
which generated $1,679,730 of cash in the first six months of 1996 as compared
to $1,212,893 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 $457,560 during the first half of 1996 as
compared to the first half 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.
Short-term liquidity:
At June 30, 1996, the Partnership held cash and cash equivalents of $4,777,995.
This balance provides a reasonable level of working capital for the
Partnership's immediate needs in operating its properties.
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 $265,640, which is included in escrow deposits
on the Balance Sheets. The present cash balance is believed to provide an
adequate reserve for property operations.
<PAGE>
The Partnership anticipates making distributions in the third quarter of 1996
totaling $250,000 to the limited partners of record as of August 1, 1996.
Long-term liquidity:
While the outlook for maintenance of adequate levels of liquidity is favorable,
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 refinancings, deferral of capital expenditures
on Partnership properties except where improvements are expected to increase the
competitiveness and marketability of the properties, arranging financing from
affiliates or the ultimate sale of the properties. Sales and refinancings are
possibilities only, and there are at present no plans for any such sales or
refinancings.
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 June 30, 1996, $4,082,159
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.
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 set for the week of October 14, 1996; however, the final
outcome of this litigation cannot be determined at this time.
<PAGE>
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.
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 $1.8 million in addition
to related legal fees. No accrual has been recorded related to this
litigation.
<PAGE>
Two class action lawsuits styled Robert Lewis vs. McNeil Partners, L.P., et.
al., filed in the District Court of Dallas County, Texas, and James F.
Schofield, et. al. vs. McNeil Partners, L.P., et. al., filed in the United
States District Court, Southern District of New York, have been voluntarily
dismissed without prejudice by the respective plaintiffs in such actions.
ITEM 5. OTHER INFORMATION
- ------- -----------------
On August 5, 1996, High River Limited Partnership ("High River"), a partnership
controlled by Carl Icahn ("Icahn"), and certain Icahn's affiliates, filed
documents with the Securities and Exchange Commission disclosing that High River
had entered into a letter agreement dated August 2, 1996 with the attorneys for
the plaintiffs in the case styled James F. Schofield, et. al. ("Plaintiffs") v.
McNeil Partners, L.P., et. al. The letter agreement provided, among other
things, that (i) High River will commence, as soon as possible, but in no event
more than six months, a tender offer for any and all of the outstanding Units of
the Partnership and other affiliated partnerships (the "Partnerships") at a
price that is not less than 75% of the estimated liquidation value of the Units
(as determined by utilizing the same methodology that was used to determine the
liquidation values in High River's previous tender offers for the Partnerships,
as previously disclosed), which tender offer may be subject to such other terms
and conditions as High River determines in its sole discretion; (ii) in the
event that High River attains the position of general partner in any of the
Partnerships: (a) High River will take all actions necessary to cause a 25%
reduction of fees of such Partnerships, (b) High River will not cause such
Partnerships to take any action to discontinue the litigation with respect to
receivable claims and (c) High River and Plaintiffs' counsel will in good faith
execute an appropriate Stipulation of Settlement based upon the terms of the
letter agreement, which stipulation shall not include a settlement or provide a
release of the receivable claims; and (iii) from and after the date of the
letter agreement, Plaintiffs' counsel agreed they will not enter into any
settlement of the claims asserted in such litigation that does not provide for
all consideration contained in a demand letter dated June 24, 1996.
<PAGE>
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 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 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
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> 4,777,995
<SECURITIES> 0
<RECEIVABLES> 1,425,769
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0
0
<OTHER-SE> 37,233,213
<TOTAL-LIABILITY-AND-EQUITY> 47,020,332
<SALES> 4,621,164
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