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 March 31, 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 0-15460
---------
MCNEIL REAL ESTATE FUND XXVI, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0168395
- --------------------------------------------------------------------------------
(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 XXVI, L.P.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
ASSETS
- ------
Real estate investments:
<S> <C> <C>
Land ...................................................... $ 6,750,456 $ 6,750,456
Buildings and improvements ................................ 55,882,777 55,757,865
------------ ------------
62,633,233 62,508,321
Less: Accumulated depreciation and amortization .......... (27,551,024) (26,899,633)
------------ ------------
35,082,209 35,608,688
Cash and cash equivalents .................................... 2,220,734 2,256,842
Cash segregated for security deposits ........................ 232,886 232,083
Accounts receivable, net of allowance for doubtful
accounts of $203,657 at March 31, 1999 and
December 31, 1998 ......................................... 1,206,783 1,123,136
Prepaid commissions .......................................... 369,552 387,092
Prepaid expenses and other assets ............................ 294,032 254,614
Deferred borrowing costs, net of accumulated
amortization of $266,403 and $255,443 at
March 31, 1999 and December 31, 1998,
respectively .............................................. 184,758 186,238
------------ ------------
$ 39,590,954 $ 40,048,693
============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------
Mortgage notes payable ....................................... $ 18,902,015 $ 18,981,387
Accounts payable and accrued expenses ........................ 234,869 247,764
Accrued property taxes ....................................... 161,098 40,161
Payable to affiliates - General Partner ...................... 1,044,323 931,891
Security deposits and deferred rental revenue ................ 281,176 219,345
------------ ------------
20,623,481 20,420,548
------------ ------------
Partners' equity (deficit):
Limited Partners - 90,000,000 Units authorized;
86,530,671 Units issued and outstanding
at March 31, 1999 and December 31, 1998 ................. 19,386,947 20,046,031
General Partner ........................................... (419,474) (417,886)
------------ ------------
18,967,473 19,628,145
------------ ------------
$ 39,590,954 $ 40,048,693
============ ============
</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 XXVI, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
----------- -----------
Revenue:
<S> <C> <C>
Rental revenue .............................................. $ 2,167,694 $ 2,305,260
Interest .................................................... 22,335 29,888
----------- -----------
Total revenue ............................................. 2,190,029 2,335,148
----------- -----------
Expenses:
Interest .................................................... 370,219 431,508
Depreciation and amortization ............................... 651,391 617,090
Property taxes .............................................. 188,591 190,233
Personnel expenses .......................................... 192,505 226,794
Utilities ................................................... 244,676 233,841
Repairs and maintenance ..................................... 233,765 231,502
Property management fees -affiliates ........................ 128,494 131,038
Other property operating expenses ........................... 111,723 121,798
General and administrative .................................. 56,090 122,726
General and administrative - affiliates ..................... 171,369 192,692
----------- -----------
Total expenses ............................................ 2,348,823 2,499,222
----------- -----------
Net loss ........................................................ $ (158,794) $ (164,074)
=========== ===========
Net loss allocable to limited partners .......................... $ (157,206) $ (162,433)
Net loss allocable to General Partner ........................... (1,588) (1,641)
----------- -----------
Net loss ........................................................ $ (158,794) $ (164,074)
=========== ===========
Net loss per thousand limited partnership units ................. $ (1.82) $ (1.88)
=========== ===========
Distributions per thousand limited partnership units ............ $ 5.80 $ 17.33
=========== ===========
</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 XXVI, L.P.
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Total
Partners'
General Limited Equity
Partner Partners (Deficit)
------------- ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1997 ............... $ (410,929) $ 23,273,176 $ 22,862,247
Net loss ................................... (1,641) (162,433) (164,074)
Distributions to limited partners .......... -- (1,499,992) (1,499,992)
------------ ------------ ------------
Balance at March 31, 1998 .................. $ (412,570) $ 21,610,751 $ 21,198,181
============ ============ ============
Balance at December 31, 1998 ............... $ (417,886) $ 20,046,031 $ 19,628,145
Net loss ................................... (1,588) (157,206) (158,794)
Distributions to limited partners .......... -- (501,878) (501,878)
------------ ------------ ------------
Balance at March 31, 1999 .................. $ (419,474) $ 19,386,947 $ 18,967,473
============ ============ ============
</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 XXVI, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from tenants ........................ $ 2,144,327 $ 2,229,814
Cash paid to suppliers ............................ (872,283) (1,145,366)
Cash paid to affiliates ........................... (187,431) (130,809)
Interest received ................................. 22,335 29,888
Interest paid ..................................... (359,760) (408,523)
Property taxes paid and escrowed .................. (67,654) (111,637)
----------- -----------
Net cash provided by operating activities ............ 679,534 463,367
----------- -----------
Net cash used in investing activities:
Additions to real estate investments and
asset held for sale ............................. (124,912) (17,115)
----------- -----------
Cash flows from financing activities:
Principal payments on mortgage notes payable ...... (79,372) (97,980)
Deferred borrowing costs paid ..................... (9,480) --
Distributions to limited partners ................. (501,878) (1,499,992)
----------- -----------
Net cash used in financing activities ................ (590,730) (1,597,972)
----------- -----------
Net decrease in cash and cash equivalents ............ (36,108) (1,151,720)
Cash and cash equivalents at beginning of
period ............................................ 2,256,842 2,823,216
----------- -----------
Cash and cash equivalents at end of period ........... $ 2,220,734 $ 1,671,496
=========== ===========
</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 XXVI, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Reconciliation of Net Loss to Net Cash Provided by Operating Activities
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net loss .............................................. $(158,794) $(164,074)
--------- ---------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ...................... 651,391 617,090
Amortization of deferred borrowing costs ........... 10,960 23,449
Changes in assets and liabilities:
Cash segregated for security deposits ............ (803) (3,824)
Accounts receivable .............................. (83,647) (26,620)
Prepaid commissions .............................. 17,540 (27,581)
Prepaid expenses and other assets ................ (39,418) 6,615
Accounts payable and accrued expenses ............ (12,895) (187,355)
Accrued property taxes ........................... 120,937 78,596
Payable to affiliates - General Partner .......... 112,432 192,921
Security deposits and deferred rental
revenue ........................................ 61,831 (45,850)
--------- ---------
Total adjustments .............................. 838,328 627,441
--------- ---------
Net cash provided by operating activities ............. $ 679,534 $ 463,367
========= =========
</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 XXVI, L.P.
Notes to Financial Statements
March 31, 1999
(Unaudited)
NOTE 1.
- -------
McNeil Real Estate Partners XXVI, L.P., (the "Partnership"), formerly known as
Southmark Equity Partners III, Ltd. was organized on March 4, 1985 as a limited
partnership under the provisions of the California Revised Limited Partnership
Act to acquire and operate residential and commercial 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 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 three months ended March 31, 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 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 XXVI, 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 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 property. 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 incurring an asset management fee which is payable to the
General Partner. Through 1999, the Asset Management Fee is calculated as 1% of
the Partnership's tangible asset value. Tangible asset value is determined by
using the greater of (i) an amount calculated by applying a capitalization rate
of 9% to the annualized net operating income of each property or (ii) a value of
$10,000 per apartment unit for residential property and $50 per gross square
foot for commercial property to arrive at the property tangible asset value. The
property tangible asset value is then added to the book value of all other
assets excluding intangible items. The fee percentage decreases to .75% in 2000,
.50% in 2001 and .25% thereafter. Total accrued but unpaid asset management fees
of $811,979 were outstanding at March 31, 1999.
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner and its affiliates are as follows:
Three Months Ended
March 31,
--------------------------
1999 1998
---------- -----------
Property management fees - affiliates.......... $ 128,494 $ 131,038
Charged to general and administrative -
affiliates:
Partnership administration.................. 43,472 42,465
Asset management fee........................ 127,897 150,227
----------- -----------
$ 299,863 $ 323,730
=========== ===========
The total payable to affiliates - General Partner at March 31, 1999 and December
31, 1998 consisted primarily of unpaid asset management fees, property
management fees and partnership general and administrative expenses and are due
and payable from current operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FINANCIAL CONDITION
- -------------------
The Partnership is engaged in diversified real estate activities, including the
ownership, operation and management of residential and commercial real estate
and other real estate related assets. At March 31, 1999, the Partnership owned
one apartment property, two office buildings and one retail center. Three of the
four Partnership's properties are subject to mortgage notes.
RESULTS OF OPERATIONS
Revenue:
Total Partnership revenue decreased by $145,119 for the three months ended March
31, 1999 as compared to the same period in 1998. Excluding the effects of the
sale of Edison Ford Square in April 1998, Partnership revenue decreased $9,571
for the three months ended March 31, 1999 as compared to the same period last
year.
<PAGE>
Interest income for the three months ended March 31, 1999 decreased by $7,553 as
compared to the same period last year due to an decrease in the average cash
balance being invested in interest bearing accounts.
Expenses:
Total expenses decreased by $150,399 for the three months ended March 31, 1999
as compared to the same period of 1998. Excluding the effects of the sale of
Edison Ford Square, Partnership expenses decreased $74,618 or 3% for the three
months ended March 31, 1999.
Interest expense decreased by $61,289 or 14% for the quarter ended March 31,
1999 as compared to the same period in 1998 due to the payoff of the mortgage
note payable on Westwood Center.
General and administrative expenses decreased for the three months ended March
31, 1999 by $66,636 as compared to the same period in 1998. The decrease was
mainly due to a decrease in costs incurred to explore alternatives to maximize
the value of the Partnership (see Liquidity and Capital Resources).
For the three months ended March 31, 1999, general and administrative -
affiliates decreased by $21,323 or 11% as compared to the same period in 1998,
mainly due to a reduction in overhead expenses allocated to the Partnership by
McREMI.
All other remaining expenses, excluding Edison Ford Square, remained comparable
to the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership generated $679,534 of cash through operating activities for the
three months ended March 31, 1999 as compared to $463,367 for the same period in
1998. The $216,167 increase is primarily due to the decrease in cash paid to
suppliers.
The Partnership expended $124,912 and $17,115 in capital improvements to its
properties for the three months ended March 31, 1999 and 1998, respectively.
Total principal payments on mortgage notes payable were $79,372 for the three
months ended March 31, 1999 as compared to $97,980 for the same period of 1998.
The Partnership also distributed $501,878 to the limited partners during 1999,
while $1,499,992 was paid during the same period in 1998. The Partnership also
paid $9,480 in deferred borrowing costs for the three months ended March 31,
1999 due to the extension on Amargosa Creek's mortgage note payable.
Short-term liquidity:
At March 31, 1999, the Partnership held cash and cash equivalents of $2,220,734.
The present cash balance plus cash to be provided by operating activities is
considered adequate to meet the Partnership's needs for debt service, normal
amounts of repairs and maintenance and capital improvements to preserve and
enhance the value of the properties. The Partnership has budgeted $1.3 million
for necessary capital improvements for all properties in 1999.
<PAGE>
Long-term liquidity:
While the present outlook for the Partnership's liquidity is favorable, market
conditions may change and property operations could deteriorate. In that event,
the Partnership would require other sources of working capital. No such other
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. There is no assurance that affiliate
support could be arranged, since neither the General Partner nor any affiliates
have any obligation in this regard.
As previously announced, the Partnership has retained PaineWebber, Incorporated
as its exclusive financial advisor to explore alternatives to maximize the value
of the Partnership, including, without limitation, a transaction in which
limited partnership interests in the Partnership are converted into cash. During
the last full week of March, the Partnership entered into a 45 day exclusivity
agreement with a well-financed bidder with whom it had commenced discussions
with respect to a sale transaction. The Partnership and such party have made
significant progress in negotiating the terms of a proposed transaction and are
continuing to have intensive discussions with respect to a transaction. In light
on these continuing negotiations, the exclusivity agreement has been extended
for an additional 21 days until June 4, 1999. It is possible that the General
Partner and its affiliates will receive non-cash consideration for their
ownership interests in connection with any such transaction. There can be no
assurance regarding whether any such agreement will be reached nor the terms
thereof.
Distributions:
During the first quarter of 1999, the Partnership distributed $501,878 to the
limited partners.
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 March 31, 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 will assess these risks and develop plans to mitigate
possible failures by July 1999.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits.
Exhibit
Number Description
------- -----------
4. Amended and Restated Limited Partnership
Agreement dated March 30, 1992.
(Incorporated by reference to Current Report
of the Registrant on Form 8-K dated March
30, 1992, as filed on April 10, 1992).
4.1 Amendment No. 1 to the Amended and Restated
Limited Partnership Agreement of McNeil Real
Estate Fund XXVI, L.P. dated June 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 unit
information has been computed based on
86,531 limited partnership units (in
thousands) outstanding in 1999 and 1998,
respectively.
27. Financial Data Schedule for the quarter
ended March 31, 1999.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the
quarter ended March 31, 1999.
<PAGE>
MCNEIL REAL ESTATE FUND XXVI, 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 XXVI, L.P.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
May 17, 1999 By: /s/ Ron K. Taylor
- ------------ ---------------------------------------------
Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)
May 17, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,220,734
<SECURITIES> 0
<RECEIVABLES> 1,410,440
<ALLOWANCES> (203,657)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 62,633,233
<DEPRECIATION> (27,551,024)
<TOTAL-ASSETS> 39,590,954
<CURRENT-LIABILITIES> 0
<BONDS> 18,902,015
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 39,590,954
<SALES> 2,167,694
<TOTAL-REVENUES> 2,190,029
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,978,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370,219
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (158,794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (158,794)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>