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 0-15460
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MCNEIL REAL ESTATE FUND XXVI, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0168395
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(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>
June 30, December 31,
1999 1998
------------- -------------
ASSETS
- ------
Real estate investments:
<S> <C> <C>
Land .................................................. $ 6,750,456 $ 6,750,456
Buildings and improvements ............................ 56,029,546 55,757,865
------------ ------------
62,780,002 62,508,321
Less: Accumulated depreciation and amortization ...... (28,203,968) (26,899,633)
------------ ------------
34,576,034 35,608,688
Cash and cash equivalents ................................ 2,671,375 2,256,842
Cash segregated for security deposits .................... 236,701 232,083
Accounts receivable, net of allowance for doubtful
accounts of $78,539 and $203,657 at June 30, 1999
and December 31, 1998, respectively ................... 1,133,657 1,123,136
Prepaid commissions ...................................... 357,605 387,092
Prepaid expenses and other assets ........................ 400,844 254,614
Deferred borrowing costs, net of accumulated
amortization of $277,364 and $255,443 at
June 30, 1999 and December 31, 1998,
respectively .......................................... 173,797 186,238
------------ ------------
$ 39,550,013 $ 40,048,693
============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------
Mortgage notes payable ................................... $ 18,821,130 $ 18,981,387
Accounts payable and accrued expenses .................... 402,863 247,764
Accrued property taxes ................................... 309,581 40,161
Payable to affiliates - General Partner .................. 1,213,050 931,891
Security deposits and deferred rental revenue ............ 299,965 219,345
------------ ------------
21,046,589 20,420,548
------------ ------------
Partners' equity (deficit):
Limited Partners - 90,000,000 Units authorized;
86,530,671 Units issued and outstanding
at June 30, 1999 and December 31, 1998 .............. 18,927,538 20,046,031
General Partner ....................................... (424,114) (417,886)
------------ ------------
18,503,424 19,628,145
------------ ------------
$ 39,550,013 $ 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 Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
Rental revenue ..................... $ 2,121,614 $ 2,099,774 $ 4,289,308 $ 4,405,034
Interest ........................... 24,806 44,667 47,141 74,555
Gain on sale of real estate ........ -- 116,297 -- 116,297
Other income ....................... 23,128 -- 23,128 --
----------- ----------- ----------- -----------
Total revenue .................... 2,169,548 2,260,738 4,359,577 4,595,886
----------- ----------- ----------- -----------
Expenses:
Interest ........................... 368,698 429,606 738,917 861,114
Depreciation and
amortization ..................... 652,944 632,028 1,304,335 1,249,118
Property taxes ..................... 238,303 177,985 426,894 368,218
Personnel expenses ................. 197,614 178,080 390,119 404,874
Utilities .......................... 234,318 236,319 478,994 470,160
Repairs and maintenance ............ 248,331 247,405 482,096 478,907
Property management
fees - affiliates ................ 131,286 137,215 259,780 268,253
Other property operating
expenses ......................... 111,580 109,459 223,303 231,257
General and administrative ......... 290,611 108,716 346,701 231,442
General and administrative -
affiliates ....................... 159,912 201,892 331,281 394,584
----------- ----------- ----------- -----------
Total expenses ................... 2,633,597 2,458,705 4,982,420 4,957,927
----------- ----------- ----------- -----------
Net loss .............................. $ (464,049) $ (197,967) $ (622,843) $ (362,041)
=========== =========== =========== ===========
Net loss allocable
to limited partners ................ $ (459,409) $ (195,987) $ (616,615) $ (358,421)
Net loss allocable
to General Partner ................. (4,640) (1,980) (6,228) (3,620)
----------- ----------- ----------- -----------
Net loss .............................. $ (464,049) $ (197,967) $ (622,843) $ (362,041)
=========== =========== =========== ===========
Net loss per thousand
limited partnership units .......... $ (5.31) $ (2.30) $ (7.13) $ (4.14)
=========== =========== =========== ===========
Distribution 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 Six Months Ended June 30, 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 ................................ (3,620) (358,421) (362,041)
Distributions to limited partners........ -- (1,499,992) (1,499,992)
------------ ------------ ------------
Balance at June 30, 1998 ................ $ (414,549) $ 21,414,763 $ 21,000,214
============ ============ ============
Balance at December 31, 1998 ............ $ (417,886) $ 20,046,031 $ 19,628,145
Net loss ................................ (6,228) (616,615) (622,843)
Distributions to limited partners ....... -- (501,878) (501,878)
------------ ------------ ------------
Balance at June 30, 1999 ................ $ (424,114) $ 18,927,538 $ 18,503,424
============ ============ ============
</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>
Six Months Ended
June 30,
--------------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from tenants ...................... $ 4,349,795 $ 4,470,362
Cash paid to suppliers .......................... (1,876,852) (2,091,567)
Cash paid to affiliates ......................... (309,902) (231,205)
Interest received ............................... 47,141 74,555
Interest paid ................................... (718,007) (815,153)
Property taxes paid ............................. (157,474) (228,610)
Property tax refund ............................. 23,128 --
----------- -----------
Net cash provided by operating activities .......... 1,357,829 1,178,382
----------- -----------
Cash flows from investing activities:
Additions to real estate investments and
asset held for sale ........................... (271,681) (218,305)
Proceeds from sale of real estate ............... -- 3,324,955
----------- -----------
Net cash provided by (used in) investing
activities ...................................... (271,681) 3,106,650
----------- -----------
Cash flows from financing activities:
Principal payments on mortgage notes payable .... (160,257) (197,853)
Deferred borrowing costs paid ................... (9,480) --
Distributions to limited partners ............... (501,878) (1,499,992)
----------- -----------
Net cash used in financing activities .............. (671,615) (1,697,845)
----------- -----------
Net increase in cash and cash equivalents .......... 414,533 2,587,187
Cash and cash equivalents at beginning of
period .......................................... 2,256,842 2,823,216
----------- -----------
Cash and cash equivalents at end of period ......... $ 2,671,375 $ 5,410,403
=========== ===========
</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>
Six Months Ended
June 30,
1999 1998
------------ ------------
<S> <C> <C>
Net loss ............................................ $ (622,843) $ (362,041)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .................... 1,304,335 1,249,118
Amortization of deferred borrowing costs ......... 21,921 46,898
Gain on sale of real estate ...................... -- (116,297)
Changes in assets and liabilities:
Cash segregated for security deposits .......... (4,618) (5,055)
Accounts receivable ............................ (10,521) 59,218
Prepaid commissions ............................ 29,487 9,982
Prepaid expenses and other assets .............. (146,230) (70,859)
Accounts payable and accrued expenses .......... 155,099 (206,943)
Accrued property taxes ......................... 269,420 139,608
Payable to affiliates - General Partner ........ 281,159 431,632
Security deposits and deferred rental
revenue ...................................... 80,620 3,121
----------- -----------
Total adjustments ............................ 1,980,672 1,540,423
----------- -----------
Net cash provided by operating activities ........... $ 1,357,829 $ 1,178,382
=========== ===========
</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
June 30, 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 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 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 $931,866 were outstanding at June 30, 1999.
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner and its affiliates are as follows:
Six Months Ended
June 30,
-----------------------
1999 1998
--------- ---------
Property management fees - affiliates................ $ 259,780 $ 268,253
Charged to gain on sale of real estate:
Disposition fee................................... -- 106,500
Charged to general and administrative -
affiliates:
Partnership administration........................ 83,497 92,905
Asset management fee.............................. 247,784 301,679
--------- ---------
$ 591,061 $ 769,337
========= =========
The total payable to affiliates - General Partner at June 30, 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.
NOTE 4.
- -------
On April 28, 1998, the Partnership sold to an unaffiliated buyer, Edison Ford
Square, an 145,417 square foot shopping center located in Fort Myers, Florida,
for a cash purchase price of $3,550,000. Cash proceeds from this transaction, as
well as the gain on sale is detailed below:
<TABLE>
<CAPTION>
Gain on Sale Cash Proceeds
------------ -------------
<S> <C> <C>
Cash sales price ........................... $ 3,550,000 $ 3,550,000
Selling costs .............................. (225,045) (225,045)
Basis of real estate sold .................. (3,208,658)
-----------
Gain on sale of real estate ................ $ 116,297
=========== -----------
Proceeds from sale of real estate........... $ 3,324,955
===========
</TABLE>
<PAGE>
The selling costs above include a disposition fee at 3% of the gross sales price
paid to the General Partner in the amount of $106,500. The disposition fee was
paid in December 1998.
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 $0.27.
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 $1,251,306.
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. 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 $73,860 to reflect the
reallocation of previously paid transaction costs among the Partnerships and
McREMI.
<PAGE>
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 June 30, 1999, the Partnership owned
one apartment property, two office buildings and one retail center. Two of the
Partnership's four properties are subject to mortgage notes.
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, XXV 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.
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 based its
<PAGE>
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 $0.27.
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 $91,190 or 4% and $236,309 or 5% for the
three and six months ended June 30, 1999 as compared to the same period in 1998.
Excluding the effects of the sale of Edison Ford Square in April 1998,
Partnership revenue increased $68,368 for the six months ended June 30, 1999 as
compared to the same period last year. In 1999, the Partnership recorded other
income of $23,128 due to a property tax refund on Amargosa Creek.
Interest income for the three and six months ended June 30, 1999 decreased by
$19,861 and $27,414 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 increased by $174,892 and $24,493 for the three and six months
ended June 30, 1999 as compared to the same period of 1998. Excluding the
effects of the sale of Edison Ford Square, Partnership expenses increased
$205,892 and $131,274 for the three and six months ended June 30, 1999.
Interest expense decreased by $60,908 and $122,197 or 14% for the three and six
months June 30, 1999 as compared to the same period in 1998 due to the payoff of
the mortgage note payable on Westwood Center.
For the three and six months ended June 30, 1999, property taxes increased by
$62,320 or 36% and $74,928 or 21%, excluding Edison Ford Square, as compared to
the same period in 1998. This increase is due to an increase in the estimated
tax liability at Northway Mall, Continental Plaza and Westwood Center.
General and administrative expense increased by $181,895 and $115,259 for the
three and six months ended June 30, 1999. The increase was mainly due to
increased costs incurred to explore alternatives to maximize the value of the
Partnership (see Recent Developments) and due to a $73,860 reallocation of
previously paid transaction costs among the Partnerships and McREMI in the
second quarter of 1999 (see Note 5).
General and administrative - affiliate expenses decreased for the three and six
months ended June 30, 1999 by $41,980 and $63,303, respectively, as compared to
the same period in 1998. The decrease was mainly due to a decrease 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 $1,357,829 of cash through operating activities for
the six months ended June 30, 1999 as compared to $1,178,382 for the same period
in 1998. The $179,447 increase is primarily due to the decrease in cash paid to
suppliers.
<PAGE>
The Partnership expended $271,681 and $218,305 in capital improvements to its
properties for the six months ended June 30, 1999 and 1998, respectively. In
1998, the Partnership received proceeds of $3,324,955 from the sale of Edison
Ford Square.
Total principal payments on mortgage notes payable were $160,257 for the six
months ended June 30, 1999 as compared to $197,853 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 six months ended June 30, 1999
due to the two year extension on Amargosa Creek's mortgage note payable.
Short-term liquidity:
At June 30, 1999, the Partnership held cash and cash equivalents of $2,671,375.
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.
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. See "Recent Developments" above.
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
<PAGE>
purportedly false and misleading statements opposing the offers and
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 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 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 Note 5.
<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
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> 2,671,375
<SECURITIES> 0
<RECEIVABLES> 1,212,196
<ALLOWANCES> (78,539)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 62,780,002
<DEPRECIATION> (28,203,968)
<TOTAL-ASSETS> 39,550,013
<CURRENT-LIABILITIES> 0
<BONDS> 18,821,130
0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 39,550,013
<SALES> 4,289,308
<TOTAL-REVENUES> 4,359,577
<CGS> 0
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<OTHER-EXPENSES> 4,243,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 738,917
<INCOME-PRETAX> 0
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<INCOME-CONTINUING> (622,843)
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<EXTRAORDINARY> 0
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<NET-INCOME> (622,843)
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