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 quarterly period ended June 30, 1999
-------------------------------------------
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 600, 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>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
MCNEIL REAL ESTATE FUND XXV, L.P.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
ASSETS
- ------
Real estate investments:
<S> <C> <C>
Land ....................................................... $ 4,205,425 $ 4,205,425
Buildings and improvements ................................. 48,631,908 48,374,279
------------ ------------
52,837,333 52,579,704
Less: Accumulated depreciation and amortization ........... (30,438,280) (29,325,158)
------------ ------------
22,399,053 23,254,546
Asset held for sale ........................................... 9,087,646 9,016,824
Cash and cash equivalents ..................................... 4,340,686 3,654,369
Cash segregated for security deposits ......................... 335,217 389,318
Accounts receivable, net of allowance for doubtful
accounts of $490,956 and $530,164 at June 30, 1999
and December 31, 1998, respectively ........................ 517,422 506,774
Escrow deposits ............................................... 106,498 93,305
Deferred borrowing costs, net of accumulated
amortization of $99,586 and $95,019 at June 30,
1999 and December 31, 1998, respectively ................... 235,619 223,731
Prepaid expenses and other assets ............................. 308,446 309,634
------------ ------------
$ 37,330,587 $ 37,448,501
============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------
Mortgage note payable ......................................... $ 7,060,917 $ 7,094,110
Accounts payable and accrued expenses ......................... 270,671 88,673
Accrued interest .............................................. 60,312 60,596
Accrued property taxes ........................................ 538,193 566,683
Payable to affiliates ......................................... 1,500,474 1,091,046
Land lease obligation ......................................... 120,282 152,791
Security deposits and deferred rental revenue ................. 444,104 439,632
------------ ------------
9,994,953 9,493,531
------------ ------------
Partners' equity (deficit):
Limited partners - 84,000,000 limited partnership
units authorized; 82,943,685 limited partnership
units issued and outstanding at June 30, 1999
and December 31, 1998 .................................... 27,814,036 28,437,132
General Partner ............................................ (478,402) (482,162)
------------ ------------
27,335,634 27,954,970
------------ ------------
$ 37,330,587 $ 37,448,501
============ ============
</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,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue:
<S> <C> <C> <C> <C>
Rental revenue .................. $2,515,206 $2,475,140 $5,012,024 $4,871,499
Interest ........................ 49,231 30,684 99,836 78,233
Other revenue ................... -- 126,035 -- 126,035
---------- ---------- ---------- ----------
Total revenue ................. 2,564,437 2,631,859 5,111,860 5,075,767
---------- ---------- ---------- ----------
Expenses:
Interest ........................ 192,487 199,474 386,414 399,334
Depreciation and
amortization .................. 549,655 582,883 1,113,122 1,182,469
Property taxes .................. 226,567 205,341 444,031 425,742
Personnel costs ................. 215,142 177,798 417,087 393,266
Utilities ....................... 166,139 159,458 347,403 345,998
Repairs and maintenance ......... 291,365 265,045 526,577 506,592
Property management
fees - affiliates ............. 149,598 151,051 288,849 289,668
Other property operating
expenses ...................... 163,684 154,258 330,385 335,645
General and administrative ...... 347,679 176,994 408,900 276,088
General and administrative -
affiliates .................... 235,698 230,921 473,104 448,793
---------- ---------- ---------- ----------
Total expenses ................ 2,538,014 2,303,223 4,735,872 4,603,595
---------- ---------- ---------- ----------
Net income ......................... $ 26,423 $ 328,636 $ 375,988 $ 472,172
========== ========== ========== ==========
Net income allocable to
limited partners ................ $ 26,159 $ 325,349 $ 372,228 $ 467,450
Net income allocable to
General Partner ................. 264 3,287 3,760 4,722
---------- ---------- ---------- ----------
Net income ......................... $ 26,423 $ 328,636 $ 375,988 $ 472,172
========== ========== ========== ==========
Net income per thousand
limited partnership units ....... $ .32 $ 3.93 $ 4.49 $ 5.64
========== ========== ========== ==========
Distributions per thousand
limited partnership units ....... $ -- $ -- $ 12.00 $ 27.13
========== ========== ========== ==========
</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, 1999 and 1998
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Equity (Deficit)
------------- ------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1997 ........... $ (491,296) $ 30,280,535 $ 29,789,239
Net income ............................. 4,722 467,450 472,172
Distributions to limited partners ...... -- (2,249,990) (2,249,990)
------------ ------------ ------------
Balance at June 30, 1998 ............... $ (486,574) $ 28,497,995 $ 28,011,421
============ ============ ============
Balance at December 31, 1998 ........... $ (482,162) $ 28,437,132 $ 27,954,970
Net income ............................. 3,760 372,228 375,988
Distributions to limited partners ...... -- (995,324) (995,324)
------------ ------------ ------------
Balance at June 30, 1999 ............... $ (478,402) $ 27,814,036 $ 27,335,634
============ ============ ============
</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 (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from tenants ........................ $ 5,058,511 $ 5,094,632
Cash paid to suppliers ............................ (1,845,729) (1,921,414)
Cash paid to affiliates ........................... (352,525) (371,490)
Interest received ................................. 99,836 78,233
Interest paid ..................................... (382,131) (395,024)
Property taxes paid and escrowed .................. (485,713) (507,865)
----------- -----------
Net cash provided by operating activities ............ 2,092,249 1,977,072
----------- -----------
Cash flows from investing activities:
Additions to real estate investments and
asset held for sale ............................. (328,451) (185,245)
----------- -----------
Cash flows from financing activities:
Principal payments on mortgage note
payable ......................................... (33,193) (29,973)
Deferred borrowing costs paid ..................... (16,455) --
Payments on capitalized land lease
obligation ...................................... (32,509) (22,837)
Distributions to limited partners ................. (995,324) (2,249,990)
----------- -----------
Net cash used in financing activities ................ (1,077,481) (2,302,800)
----------- -----------
Net increase (decrease) in cash and cash
equivalents ...................................... 686,317 (510,973)
Cash and cash equivalents at beginning of
period ............................................ 3,654,369 3,044,669
----------- -----------
Cash and cash equivalents at end of period ........... $ 4,340,686 $ 2,533,696
=========== ===========
</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 Income to Net Cash
Provided by Operating Activities
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income ........................................... $ 375,988 $ 472,172
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 1,113,122 1,182,469
Amortization of deferred borrowing costs .......... 4,567 4,566
Changes in assets and liabilities:
Cash segregated for security deposits ........... 54,101 (4,140)
Accounts receivable, net ........................ (10,648) 5,545
Escrow deposits ................................. (13,193) (32,020)
Prepaid expenses and other assets ............... 1,188 23,872
Accounts payable and accrued expenses ........... 181,998 (77,025)
Accrued interest ................................ (284) (256)
Accrued property taxes .......................... (28,490) (50,103)
Payable to affiliates ........................... 409,428 366,971
Security deposits and deferred rental
revenue ....................................... 4,472 85,021
----------- -----------
Total adjustments ............................. 1,716,261 1,504,900
----------- -----------
Net cash provided by operating activities ............ $ 2,092,249 $ 1,977,072
=========== ===========
</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, 1999
(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. The
principal place of business for the Partnership and the General Partner is 13760
Noel Road, Suite 600, 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, 1999 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1999.
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, 1998, 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 600, 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 to .75% in 2000,
.50% in 2001 and .25% thereafter. Total accrued but unpaid asset management fees
of $1,198,237 and $876,844 were outstanding at June 30, 1999 and December 31,
1998, respectively.
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,
--------------------------
1999 1998
----------- ----------
Property management fees..................... $ 288,849 $ 289,668
Charged to general and administrative
expense:
Partnership administration................ 99,650 94,941
Asset management fee...................... 373,454 353,852
----------- ----------
$ 761,953 $ 738,461
=========== ==========
Payable to affiliates at June 30, 1999 and December 31, 1998 consisted primarily
of unpaid property management fees, Partnership general and administrative
expenses and asset management fees and is due and payable from current
operations.
NOTE 4.
- -------
On July 30, 1999, the Partnership refinanced Harbour Club I's mortgage note. The
new mortgage note, in the amount of $7,200,000 bears interest at a variable rate
equal to 1.75% plus the London Interbank Offered Rate per annum. The new
mortgage note requires monthly interest-only payments and annual principal
payments in an amount necessary to reduce the principal balance of the note by
5% annually. The maturity date of the new mortgage note is August 1, 2002. Cash
proceeds from the refinancing transaction are as follows:
New mortgage note proceeds........................... $ 7,200,000
Amount required to payoff existing debt.............. 7,055,218
-----------
Cash proceeds from refinancing....................... $ 144,782
===========
The Partnership incurred $72,469 of deferred borrowing costs related to the
refinancing of Harbour Club I's mortgage note.
<PAGE>
NOTE 5.
- -------
On June 24, 1999, the Partnership and 18 affiliated partnerships, collectively
(the "Partnerships"), the General Partner, McNeil Investors, Inc., McNeil Real
Estate Management, Inc. ("McREMI"), McNeil Summerhill, Inc. and Robert A. McNeil
entered into a definitive acquisition agreement (the "Master Agreement") with
WXI/McN Realty L.L.C. ("Newco"), an affiliate of Whitehall Street Real Estate
Limited Partnership XI, a real estate investment fund managed by Goldman, Sachs
& Co., whereby Newco and its subsidiaries will acquire the Partnerships. The
Master Agreement provides that the Partnerships will be merged with subsidiaries
of Newco. The Master Agreement also provides for the acquisition by Newco and
its subsidiaries of the assets of McREMI. The aggregate consideration in the
transaction, including the assumption or prepayment of all outstanding mortgage
debt of the Partnerships, is approximately $644,440,000.
Pursuant to the terms of the Master Agreement, the limited partners in the
Partnership will receive cash on the closing date of the transaction (the
"Closing Date") in exchange for their limited partnership interests. In
addition, the Partnership will declare a special distribution to its limited
partners on the Closing Date equal to its then positive net working capital
balance, if any. The estimated aggregate consideration and net working capital
distribution to be received per unit of limited partnership interest in the
Partnership is currently estimated as $0.50.
On the Closing Date, the General Partner of the Partnership, will receive an
equity interest in Newco in exchange for its contribution to Newco of the
general partnership interests in the Partnerships, the limited partnership
interests in Fairfax Associates II L.P. and McNeil Summerhill Associates and the
assets of McREMI.
The Partnership's participation in the transaction is subject to, among other
conditions, the approval by a majority of the limited partners of the
Partnership.
In some circumstances, as defined in the Master Agreement, the Partnerships may
be subject to a break-up fee, up to an aggregate maximum of $18,000,000, if the
Master Agreement is terminated with respect to one or more of the Partnerships.
In the case of termination of the Master Agreement in these circumstances, each
of the Partnerships with respect to which the Master Agreement has been
terminated will be severally, but not jointly, liable for payment to Newco of
its respective break-up fee. The break-up fee ratably calculated for the
Partnership is $1,400,540.
All previous costs associated with this transaction had been allocated among the
Partnerships and McREMI based on the relative number of properties contained
therein. On June 24, 1999, a fairness opinion (the "Fairness Opinion") was
rendered by Robert A. Stanger & Co., Inc., an independent financial advisor, to
the effect that the aggregate consideration to be paid for the general
partnership interests and limited partnership interests in all of the
Partnerships and the assets of McREMI is fair from a financial point of view to
the holders of each class of limited partnership interests. Based on the
relative values as set forth in the Fairness Opinion, the Partnership recorded
an adjustment to general and administrative expenses and accounts payable and
accrued expenses during the second quarter of 1999 in the amount of $110,931 to
reflect the reallocation of previously paid transaction costs among the
Partnerships and McREMI. This underpayment of general and administrative
expenses is included in accounts payable and accrued expenses on the Balance
Sheet at June 30, 1999.
<PAGE>
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, 1998. The Partnership reported net income of
$375,988 for the first six months of 1999 as compared to $472,172 for the first
six months of 1998. Revenue for the first six months of 1999 increased to
$5,111,860 from $5,075,767 for the first six months of 1998, and expenses for
the six months ended June 30, 1999 increased to $4,735,872 from $4,603,595 for
the same period in 1998.
Net cash provided by operating activities was $2,092,249 for the six months
ended June 30, 1999. The Partnership expended $328,451 for capital improvements,
$16,455 for deferred borrowing costs, $33,193 for principal payments on its
mortgage note payable and $32,509 for payments on the capitalized land lease
obligation. After distributions of $995,324 to the limited partners, cash and
cash equivalents totaled $4,340,686 at June 30, 1999, a net increase of $686,317
from the balance at December 31, 1998.
RECENT DEVELOPMENTS
- -------------------
On June 24, 1999, McNeil Partners, L.P. (the General Partner of the Partnership)
and WXI/McN Realty L.L.C., an affiliate of Whitehall Street Real Estate Limited
Partnership XI ("Whitehall"), a real estate investment fund managed by Goldman,
Sachs & Co., announced that they have entered into a definitive acquisition
agreement whereby the Whitehall affiliate will acquire by merger nineteen real
estate limited partnerships operated by McNeil Partners, L.P. and Robert A.
McNeil. The limited partnerships involved are the Partnership and McNeil Real
Estate Funds IX, X, XI, XII, XIV, XV, XX, XXI, XXII, XXIII, XXIV, XXVI and
XXVII, Hearth Hollow Associates, McNeil Midwest Properties I, L.P., Regency
North Associates, Fairfax Associates and McNeil Summerhill (collectively, the
"Partnerships"). The Partnerships (other than Fairfax Associates and McNeil
Summerhill which are wholly-owned by Robert A. McNeil and related parties) will
be merged with subsidiaries of WXI/McN Realty L.L.C. The acquisition agreement
also provides for the acquisition by WXI/McN Realty L.L.C. of the assets of
McNeil Real Estate Management, Inc. ("McREMI"). The aggregate consideration in
the transaction, including all outstanding mortgage debt of the Partnerships, is
approximately $644,440,000.
Pursuant to the terms of the acquisition agreement, the limited partners in each
of the Partnerships (other than those wholly-owned by Robert A. McNeil) will
receive cash on the closing date of the transaction in exchange for their
limited partnership interests. In addition, each Partnership will make a special
distribution to its limited partners on the closing date of the transaction
equal to its then net positive working capital balance. McNeil Partners, L.P.
will receive an equity interest in WXI/McN Realty L.L.C. in exchange for its
contribution of its general partnership interests in the Partnerships, the
limited partnership interests in its wholly-owned Partnerships and the assets of
McREMI.
The proposed transaction follows an extensive marketing effort by PaineWebber
Incorporated, exclusive financial advisor to the Partnerships.
<PAGE>
The transaction has been unanimously approved by the Board of Directors of
McNeil Investors, Inc., the general partner of McNeil Partners, L.P., the
general partner of each of the Partnerships other than Regency North Associates,
Fairfax Associates and McNeil Summerhill. The respective general partners of
Regency North Associates, Fairfax Associates and McNeil Summerhill also have
approved the transaction. The Board of Directors of McNeil Investors, Inc. based
its approval upon, among other things, the recommendation of a Special Committee
of the Board, appointed at the beginning of the discussions with Whitehall to
represent the interests of holders of limited partnership interests in each of
the Partnerships. In addition, the Special Committee and the Board relied upon
fairness opinions given by Robert A. Stanger & Co., Inc. ("Stanger & Co."), an
independent financial advisor to the Partnerships, to the effect that the
aggregate consideration is fair to the holders of each class of limited
partnership interests in each of the Partnerships. The Special Committee's
recommendation was also based upon the separate opinions of Eastdil Realty
Company ("Eastdil"), the independent financial advisor to the Special Committee.
Stanger & Co. and Eastdil have each also rendered an opinion that the aggregate
consideration to be paid for the general partnership interests and limited
partnership interests in all of the Partnerships and the assets of McREMI is
fair from a financial point of view to the holders of each class of limited
partnership interests in each of the Partnerships.
Each of the Partnerships' participation in the transaction is subject to, among
other conditions, the approval by a majority of the limited partners of the
respective Partnerships. The approval of the limited partners of the
Partnerships will be sought at meetings to be held in the coming months after
the filing of proxy statements with the Securities and Exchange Commission with
respect to the publicly traded Partnerships, and the subsequent mailing of proxy
statements to the limited partners. Preliminary proxy statements were filed with
the SEC on August 3, 1999.
The aggregate consideration in the transaction has been allocated preliminarily
among the general partnership interests and the limited partnership interests in
each of the Partnerships and McREMI, based upon an allocation analysis prepared
by Stanger & Co. and confirmed by Eastdil. Based upon this allocation analysis
and the fairness opinions rendered by Stanger & Co. and Eastdil, the Special
Committee, the Board of Directors of McNeil Investors, Inc., the respective
general partners of Regency North Associates, Fairfax Associates and McNeil
Summerhill have each unanimously approved the allocation of the aggregate
consideration. The estimated aggregate consideration and working capital
distribution to be received per unit of limited partnership interest of the
Partnership is currently estimated as $0.50.
McNeil Partners, L.P. will contribute its real estate investment and management
company business to a subsidiary of WXI/McN Realty, L.L.C., along with its
general partnership interests in the Partnerships and its limited partnership
interests in the wholly-owned Partnerships, having an aggregate allocated value,
as determined by Stanger & Co., of approximately $58,640,000, of which
approximately $29,400,000 reflects balances due to McNeil Partners, L.P. and
McREMI as reflected on the Partnerships' financial statements as of March 31,
1999.
The above estimates of the Partnership per unit estimated merger consideration
and working capital distribution and the interest of McNeil Partners, L.P. are
based upon, among other things, the balance sheet of the Partnership as of March
31, 1999, adjusted for intangible assets, non-cash liabilities, transaction
expenses and the McNeil Partners, L.P. interest in the Partnership. Actual
amounts, including the estimate allocable to McNeil Partners, L.P., will vary
with the performance of the Partnership and McNeil Partners, L.P. through the
closing date. The above estimated merger consideration and special working
capital distribution will be adjusted at closing to reflect the then working
capital position of the Partnership.
<PAGE>
Whitehall is a $2.26 billion equity fund and is the seventh in a series of funds
sponsored and capitalized by Goldman, Sachs & Co. and its affiliates, along with
public and private investors, to acquire real estate worldwide.
RESULTS OF OPERATIONS
- ---------------------
Revenue:
Total Partnership revenue decreased by $67,422 for the three month period and
increased by $36,093 for the six month period ended June 30, 1999 as compared to
the same period in 1998, mainly due to an increase in rental revenue and
interest income, offset by a decrease in other revenue recognized in the second
quarter of 1998, as discussed below.
Rental revenue for the three and six months ended June 30, 1999 increased by
$40,066 and $140,525, respectively, mainly due to an increase in rental rates
charged to tenants in 1999.
Interest income increased by $18,547 and $21,603 for the three and six months
ended June 30, 1999, respectively, as compared to the same periods in 1998, due
to an increase in cash available for short-term investment. The Partnership held
approximately $4.3 million of cash and cash equivalents at June 30, 1999 as
compared to approximately $2.5 million at June 30, 1998.
In the second quarter of 1998, the Partnership recognized $126,035 of other
revenue consisting of the collection of tenant accounts receivable that had
previously been written off. No such other revenue was recognized in the first
six months of 1999.
Expenses:
Total expenses increased by $234,791 for the three month period and by $132,277
for the six month period ended June 30, 1999 as compared to the same periods in
1998. The increase was mainly due to an increase in general and administrative
expenses in the second quarter of 1999, as discussed below.
General and administrative expenses increased by $170,685 and $132,812 for the
three and six month periods ended June 30, 1999, respectively, as compared to
the same periods in 1998. The increase was mainly due to a $110,931 reallocation
of previously paid transaction costs among the Partnerships and McREMI in the
second quarter of 1999, as discussed in Item 1, Note 5.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flow provided by operating activities totaled $2,092,249 for the first six
months of 1999, comparable to the $1,977,072 provided during the same period in
1998.
The Partnership expended $328,451 and $185,245 for additions to its real estate
investments and asset held for sale during the six months ended June 30, 1999
and 1998, respectively. A greater amount was spent in the first half of 1999 for
tenant improvements at Northwest Plaza, Century Park, Kellogg Office Building
and Fidelity Plaza and for exterior painting at Fidelity Plaza.
<PAGE>
In the first half of 1999, the Partnership incurred $16,455 of costs related to
the proposed refinancing of the Harbour Club I mortgage note payable.
The Partnership distributed $995,324 and $2,249,990 to the limited partners in
the first six months of 1999 and 1998, respectively.
Short-term liquidity:
At June 30, 1999, the Partnership held cash and cash equivalents of $4,340,686.
This balance provides a reasonable level of working capital for the
Partnership's immediate needs in operating its properties.
For the Partnership as a whole, management projects positive cash flow from
operations for the remainder of 1999. Only one property, Harbour Club I
Apartments, is encumbered with mortgage debt and another property, Fidelity
Plaza, is encumbered with lease obligations. Capital improvements for all
properties in 1999 are expected to be funded from available cash reserves or
from operations of the properties.
Additional efforts to maintain and improve Partnership liquidity have included
continued attention to property management activities. The objective has been to
obtain maximum occupancy rates while holding expenses to levels necessary to
maximize cash flows. The Partnership has made capital expenditures on its
properties where improvements were expected to increase the competitiveness and
marketability of the properties.
Long-term liquidity:
While the outlook for maintenance of adequate levels of liquidity is favorable,
should operations deteriorate and present cash resources be insufficient for
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. See "Recent Developments"
above.
The Partnership placed Northwest Plaza on the market for sale effective August
1, 1997.
Forward-Looking Information:
Within this document, certain statements are made as to the expected occupancy
trends, financial condition, results of operations, and cash flows of the
Partnership for periods after June 30, 1999. All of these statements are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements are not
historical and involve risks and uncertainties. The Partnership's actual
occupancy trends, financial condition, results of operations, and cash flows for
future periods may differ materially due to several factors. These factors
include, but are not limited to, the Partnership's ability to control costs,
make necessary capital improvements, negotiate sales or refinancings of its
properties, and respond to changing economic and competitive factors.
<PAGE>
YEAR 2000 DISCLOSURE
- --------------------
State of readiness
- ------------------
The year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major systems failure or
miscalculations.
Management has assessed its information technology ("IT") infrastructure to
identify any systems that could be affected by the year 2000 problem. The IT
used by the Partnership for financial reporting and significant accounting
functions was made year 2000 compliant during recent systems conversions. The
software utilized for these functions is licensed by third party vendors who
have warranted that their systems are year 2000 compliant.
Management is in the process of evaluating the mechanical and embedded
technological systems at the various properties. Management has inventoried all
such systems and queried suppliers, vendors and manufacturers to determine year
2000 compliance. Based on this review, management believes these systems are
substantially compliant. In circumstances of non-compliance management will work
with the vendor to remedy the problem or seek alternative suppliers who will be
in compliance. Management believes that the remediation of any outstanding year
2000 conversion issues will not have a material or adverse effect on the
Partnership's operations. However, no estimates can be made as to the potential
adverse impact resulting from the failure of third party service providers and
vendors to be year 2000 compliant.
Cost
- ----
The cost of IT and embedded technology systems testing and upgrades is not
expected to be material to the Partnership. Because all the IT systems have been
upgraded over the last three years, all such systems were compliant, or made
compliant at no additional cost by third party vendors. Management anticipates
the costs of assessing, testing, and if necessary replacing embedded technology
components will be less than $50,000. Such costs will be funded from operations
of the Partnership.
Risks
- -----
Ultimately, the potential impact of the year 2000 issue will depend not only on
the corrective measures the Partnership undertakes, but also on the way in which
the year 2000 issue is addressed by government agencies and entities that
provide services or supplies to the Partnership. Management has not determined
the most likely worst case scenario to the Partnership. As management studies
the findings of its property systems assessment and testing, management will
develop a better understanding of what would be the worst case scenario.
Management believes that progress on all areas is proceeding and that the
Partnership will experience no adverse effect as a result of the year 2000
issue. However, there is no assurance that this will be the case.
<PAGE>
Contingency plans
- -----------------
Management is developing contingency plans to address potential year 2000
non-compliance of IT and embedded technology systems. Management believes that
failure of any IT system could have an adverse impact on operations. However,
management believes that alternative systems are available that could be
utilized to minimize such impact. Management believes that any failure in the
embedded technology systems could have an adverse impact on that property's
performance. Management has assessed these risks and expects to have contingency
plans in place by December 31, 1999 for any material potential failures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
1) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger,
Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners
L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert
A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real
Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate
Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund
XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund
XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund
XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow
Associates, McNeil Midwest Properties I, L.P. and Regency North Associates,
L.P., - Superior Court of the State of California for the County of Los
Angeles, Case No. BC133799 (Class and Derivative Action Complaint).
The action involves purported class and derivative actions brought by
limited partners of each of the limited partnerships that were named as
nominal defendants as listed above (the "Partnerships"). Plaintiffs allege
that McNeil Investors, Inc., its affiliate McNeil Real Estate Management,
Inc. ("McREMI") and three of their senior officers and/or directors
(collectively, the "Defendants") breached their fiduciary duties and
certain obligations under the respective Amended Partnership Agreement.
Plaintiffs allege that Defendants have rendered such Units highly illiquid
and artificially depressed the prices that are available for Units on the
resale market. Plaintiffs also allege that Defendants engaged in a course
of conduct to prevent the acquisition of Units by an affiliate of Carl
Icahn by disseminating purportedly false, misleading and inadequate
information. Plaintiffs further allege that Defendants acted to advance
their own personal interests at the expense of the Partnerships' public
unit holders by failing to sell Partnership properties and failing to make
distributions to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended
complaint. Plaintiffs are suing for breach of fiduciary duty, breach of
contract and an accounting, alleging, among other things, that the
management fees paid to the McNeil affiliates over the last six years are
excessive, that these fees should be reduced retroactively and that the
respective Amended Partnership Agreements governing the Partnerships are
invalid.
<PAGE>
Defendants filed a demurrer to the consolidated and amended complaint and a
motion to strike on February 14, 1997, seeking to dismiss the consolidated
and amended complaint in all respects. The Court granted Defendants'
demurrer, dismissing the consolidated and amended complaint with leave to
amend. On October 31, 1997, the Plaintiffs filed a second consolidated and
amended complaint. The case was stayed pending settlement discussions.
Because the settlement contemplated a transaction which included all of the
Partnerships and plaintiffs claimed that an effort should be made to sell
all of the Partnerships, in or around September 1998, plaintiffs filed a
third consolidated and amended complaint which included allegations with
respect to the Partnerships which had not been named in previously filed
complaints.
On September 15, 1998, the parties signed a Stipulation of Settlement. For
purposes of settlement, the parties stipulated to a class comprised of all
owners of limited partner units in the Partnerships during the period
beginning June 21, 1991, the earliest date that proxy materials began to be
issued in connection with the restructuring of the Partnerships, through
September 15, 1998. As structured, the Stipulation of Settlement provided
for the payment of over $35 million in distributions and the commitment to
market the Partnerships for sale, together with McREMI, through a fair and
impartial bidding process overseen by a national investment banking firm.
To ensure the integrity of that process, defendants agreed, among other
things, to involve plaintiffs' counsel in oversight of that process, and
plaintiffs' counsel retained an independent advisor to represent the
interests of limited partners of the Partnerships in the event of a
transaction. The transaction described in Item 2 - Recent Developments is a
result of that process. The settlement was not conditioned on the
consummation of this transaction.
On October 6, 1998, the court gave preliminary approval to the settlement.
It granted final approval to the settlement on July 8, 1999 and entered a
Final Order and Judgment dismissing the consolidated action with prejudice.
As a condition of final approval, the court requested, and the parties
agreed to, a slight modification of the release in the Stipulation of
Settlement with respect to future claims. Plaintiffs' counsel intends to
seek an order awarding attorneys' fees and reimbursing their out-of-pocket
expenses in an amount which is as yet undetermined. Fees and expenses shall
be allocated amongst the Partnerships on a pro rata basis, based upon
tangible asset value of each such partnership, less total liabilities,
calculated in accordance with the Amended Partnership Agreements for the
quarter most recently ended.
2) High River Limited Partnership, Unicorn Associates Corporation and Longacre
Corporation, et al. v. McNeil Partners, L.P. ("MPLP"), McNeil Investors,
Inc., McNeil Real Estate Management, Inc. (McREMI"), Robert A. McNeil and
Carole J. McNeil, - Supreme Court of the State of New York, County of New
York, - Index No. 99 603526.
On July 23, 1999, High River and two other affiliates of Carl C. Icahn
(Unicorn Associates Corporation and Longacre Corporation), filed a
complaint for damages in the Supreme Court of the State of New York, County
of New York. Plaintiffs allege that the defendants improperly interfered
with tender offers made by High River for limited partner units in the
Partnership and other affiliated partnerships in which MPLP serves as
General Partner (the "McNeil Partnerships"), by, among other things, filing
purportedly frivolous litigation to delay High River's offers, issuing
purportedly false and misleading statements opposing the offers and
<PAGE>
purportedly forcing High River itself to file litigation to enforce its
rights. High River also alleges that as a result the defendants caused High
River to incur undue expense and that the defendants ultimately prevented
High River from acquiring a greater number of limited partner units.
Plaintiffs also allege that the defendants improperly excluded High River
from participating in the auction process for the sale of the McNeil
Partnerships, and otherwise took steps to prevent its participation in the
auction. In addition, plaintiffs, who are limited partners in, among
others, McNeil Funds IX, X, XI, XII, XIV, XV, XX, XXIV, XXV, XXVI and
XXVII, have also sued the defendants based on their status as opt-outs from
the Schofield settlement. Plaintiffs seek undisclosed damages and an
accounting.
On July 30, 1999, defendants filed an answer to the High River Complaint,
denying each and every material allegation contained in the High River
Complaint and asserting several affirmative defenses.
3) 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 (as defined in this Section 3, 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,
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 Affiliated
Partnerships 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. Shortly before trial, the district court judge once again
granted summary judgment against the Affiliated Partnerships on December 2,
1996. Hearing and oral argument before the Court of Appeals was heard on
January 26, 1999. Judgment was entered in favor of the partnerships on June
25, 1999 and the case was once again remanded to the Trial Court. The
General Partner is investigating whether it is in the limited partners'
best interest to continue to pursue this case.
<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
Income per Thousand Limited Partnership
Units: Net income per thousand limited
partnership units is computed by dividing
net income 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 82,944 weighted
average thousand limited partnership units
outstanding in 1999 and 1998.
27. Financial Data Schedule for the quarter
ended June 30, 1999.
(b) Reports on Form 8-K. A Report on Form 8-K dated June 24, 1999 was
filed on June 29, 1999 regarding the transaction detailed in Part 1,
Item 1, Note 5.
<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 16, 1999 By: /s/ Ron K. Taylor
- --------------- ------------------------------------------
Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)
August 16, 1999 By: /s/ Carol A. Fahs
- --------------- ------------------------------------------
Date Carol A. Fahs
Vice President of McNeil Investors, Inc.
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,340,686
<SECURITIES> 0
<RECEIVABLES> 1,008,378
<ALLOWANCES> (490,956)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 52,837,333
<DEPRECIATION> (30,438,280)
<TOTAL-ASSETS> 37,330,587
<CURRENT-LIABILITIES> 0
<BONDS> 7,060,917
0
0
<COMMON> 0
<OTHER-SE> 27,335,634
<TOTAL-LIABILITY-AND-EQUITY> 37,330,587
<SALES> 5,012,024
<TOTAL-REVENUES> 5,111,860
<CGS> 2,354,332
<TOTAL-COSTS> 3,467,454
<OTHER-EXPENSES> 882,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386,414
<INCOME-PRETAX> 375,988
<INCOME-TAX> 0
<INCOME-CONTINUING> 375,988
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,988
<EPS-BASIC> 0
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