UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 1995 ----------------------------------------------- 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 0-7162 MCNEIL PACIFIC INVESTORS FUND 1972 ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-6279375 ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (214) 448-5800 ---------------------------- Indicate by check mark whether the registrant, (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ MCNEIL PACIFIC INVESTORS FUND 1972 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BALANCE SHEETS (Unaudited) June 30, December 31, 1995 1994 ---------- ------------ ASSETS Real estate investment: Land..................................................... $2,336,000 $2,336,000 Buildings and improvements............................... 4,818,335 4,569,577 --------- --------- 7,154,335 6,905,577 Less: Accumulated depreciation.......................... (829,116) (666,496) --------- --------- 6,325,219 6,239,081 Cash and cash equivalents................................... 736,635 1,062,361 Cash segregated for security deposits....................... 39,404 36,309 Accounts receivable......................................... 9,496 3,741 Prepaid expenses and other assets........................... 21,909 24,594 Escrow deposits............................................. 147,475 125,181 Deferred borrowing costs, net of accumulated amorti- zation of $32,026 and $26,833 at June 30, 1995 and December 31, 1994, respectively...................... 19,908 25,101 --------- --------- $7,300,046 $7,516,368 ========= ========= LIABILITIES AND PARTNERS' EQUITY Mortgage note payable....................................... $2,225,647 $2,287,341 Accounts payable............................................ 20,541 31,328 Accrued interest............................................ 10,546 16,679 Accrued property taxes...................................... 58,944 - Other accrued expenses...................................... 16,375 38,685 Payable to affiliates - General Partner..................... 12,260 93,329 Security deposits and deferred rental revenue............... 42,282 48,138 --------- --------- 2,386,595 2,515,500 --------- --------- Partners' equity: Limited partners - 15,000 limited partnership units authorized; 13,752.5 limited partnership units issued and outstanding................................. 4,603,507 4,690,924 General Partner.......................................... 309,944 309,944 --------- --------- 4,913,451 5,000,868 --------- --------- $7,300,046 $7,516,368 ========= ========= The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. MCNEIL PACIFIC INVESTORS FUND 1972 STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------------------- --------------------------- 1995 1994 1995 1994 -------- ------- -------- ---------- Revenue: Rental revenue................ $338,055 $310,915 $713,034 $ 788,129 Interest...................... 13,845 14,649 22,814 16,460 Gain on sale of real estate... - - - 574,701 ------- ------- ------- --------- Total revenue............... 351,900 325,564 735,848 1,379,290 ------- ------- ------- --------- Expenses: Interest...................... 45,829 53,357 98,017 142,700 Depreciation.................. 84,776 45,564 162,620 125,790 Property taxes................ 29,475 34,476 58,950 89,040 Personnel expenses............ 63,987 59,835 120,445 159,702 Utilities..................... 19,723 25,521 41,274 45,484 Repair and maintenance........ 92,133 84,198 158,011 163,757 Property management fees - affiliates........... 19,091 15,677 40,463 38,881 Other property operating expenses.................... 44,073 49,754 88,096 78,751 General and administrative.... 6,713 2,683 14,835 9,315 General and administrative - affiliates.................. 19,824 10,722 40,554 29,697 ------- ------- ------- --------- Total expenses.............. 425,624 381,787 823,265 883,117 ------- ------- ------- --------- Net income (loss)................ $(73,724) $(56,223) $(87,417) $ 496,173 ======= ======= ======= ========= Net income (loss) allocated to limited partners........... $(73,274) $(56,223) $(87,417) $ 730,187 Net income (loss) allocated to General Partner............ - - - (234,014) ------- ------- ------- --------- Net income (loss)................ $(73,274) $(56,223) $(87,417) $ 496,173 ======= ======= ======= ========= Net income (loss) per limited partnership unit.............. $ (5.33) $ (4.09) $ (6.36) $ 53.08 ======= ======= ======= ========= The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. MCNEIL PACIFIC INVESTORS FUND 1972 STATEMENTS OF PARTNERS' EQUITY (Unaudited) For the Six Months Ended June 30, 1995 and 1994 Total General Limited Partners' Partner Partners Equity --------- ---------- ---------- Balance at December 31, 1993.............. $ 543,958 $4,023,366 $4,567,324 Net income (loss)......................... (234,014) 730,187 496,173 -------- --------- --------- Balance at June 30, 1994.................. $ 309,944 $4,753,553 $5,063,497 ======== ========= ========= Balance at December 31, 1994.............. $ 309,944 $4,690,924 $5,000,868 Net loss.................................. - (87,417) (87,417) -------- ---------- --------- Balance at June 30, 1995.................. $ 309,944 $4,603,507 $4,913,451 ======== ========= ========= The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. MCNEIL PACIFIC INVESTORS FUND 1972 STATEMENTS OF CASH FLOWS (Unaudited) Increase (Decrease) in Cash and Cash Equivalents Six Months Ended June 30, --------------------------------- 1995 1994 --------- --------- Cash flows from operating activities: Cash received from tenants........................ $ 678,765 $ 779,113 Cash paid to suppliers............................ (433,510) (526,708) Cash paid to affiliates........................... (162,086) (43,521) Interest received................................. 22,814 16,460 Interest paid..................................... (98,957) (170,050) Property taxes paid and escrowed.................. (22,300) (35,019) --------- ---------- Net cash used in operating activities................ (15,274) 20,275 --------- ---------- Cash flows from investing activities: Additions to real estate investments.............. (248,758) (122,733) Proceeds from sale of real estate investment...... - 3,749,308 --------- ---------- Net cash provided by (used in) investing activities........................................ (248,758) 3,626,575 --------- ---------- Cash flows from financing activities: Principal payments on mortgage notes payable......................................... (61,694) (92,841) Retirement of mortgage note payable............... - (2,094,135) --------- ---------- Net cash used in financing activities................ (61,694) (2,186,976) --------- ---------- Net increase (decrease) in cash and cash equivalents.................................. (325,726) 1,459,874 Cash and cash equivalents at beginning of period............................................ 1,062,361 85,057 --------- ---------- Cash and cash equivalents at end of period........... $ 736,635 $ 1,544,931 ========= ========== The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. MCNEIL PACIFIC INVESTORS FUND 1972 STATEMENTS OF CASH FLOWS (Unaudited) Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities Six Months Ended June 30, ------------------------------- 1995 1994 --------- --------- Net income (loss).................................... $(87,417) $ 496,173 ------- -------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation...................................... 162,620 125,790 Amortization of deferred borrowing costs.......... 5,193 5,193 Gain on sale of real estate....................... - (574,701) Changes in assets and liabilities: Cash segregated for security deposits........... (3,095) 15,619 Accounts receivable............................. (5,755) 5,890 Prepaid expenses and other assets............... 2,685 25,235 Escrow deposits................................. (22,294) (11,366) Accounts payable................................ (10,787) (80,401) Accrued interest................................ (6,133) (32,544) Accrued property taxes.......................... 58,944 65,388 Other accrued expenses.......................... (22,310) (26,458) Payable to affiliates - General Partner......... (81,069) 25,057 Security deposits and deferred rental revenue....................................... (5,856) (18,600) ------- -------- Total adjustments............................. 72,143 (475,898) ------- -------- Net cash used in operating activities................ $(15,274) $ 20,275 ======= ======== The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. MCNEIL PACIFIC INVESTORS FUND 1972 Notes To Financial Statements (Unaudited) June 30, 1995 NOTE 1. ------- McNeil Pacific Investors Fund 1972 (the "Partnership") is a limited partnership organized under the laws of the State of California to invest in real property. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership affiliated with Robert A. McNeil. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240. In the opinion of management, the financial statements reflect all adjustments necessary for a fair presentation of the Partnership's financial position and results of operations. All adjustments were of a normal recurring nature. However, the results of operations for the six months ended June 30, 1995, are not necessarily indicative of the results to be expected for the year ending December 31, 1995. 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, 1994, and the notes thereto, as filed with the Securities and Exchange Commission, which is available upon request by writing to McNeil Pacific Investors Fund 1972, c/o McNeil Real Estate Management, Inc., Investor Services, 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240. NOTE 3. ------- Certain prior period amounts within the accompanying financial statements have been reclassified to conform with current year presentation. NOTE 4. ------- The General Partner is entitled to receive a partnership management fee equal to 9.5% of distributions of cash from operations when distributable cash from operations is distributed to the limited partners. No partnership management fees were incurred during the six month periods ended June 30, 1995 and 1994. The Partnership pays property management fees equal to 6% of the gross rental receipts of the Partnership's property to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management and leasing services for the Partnership's property. Prior to December 31, 1994, the Partnership paid property management fees equal to 5% of the gross rental receipts of the Partnership's properties. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. 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, ------------------------------- 1995 1994 ------- -------- Property management fees - affiliates................ $40,463 $ 38,881 Charged to general and administrative - affiliates: Partnership administration........................ 40,554 29,697 Charged to gain on sale of real estate: Brokerage commission.............................. - 81,000 ------ ------- $81,017 $149,578 ====== ======= NOTE 5. ------- On March 17, 1994, the Partnership sold its investment in Pacesetter Apartments to an unaffiliated buyer for a cash sales price of $4,050,000. Cash proceeds from the transaction, as well as the gain on sale, are detailed below. Proceeds Gain on Sale from Sale ------------ ----------- Sales price.......................................... $ 4,050,000 $ 4,050,000 Selling costs........................................ (300,692) (300,692) Basis of real estate sold............................ (3,174,607) ---------- Gain on sale of real estate investment............... $ 574,701 ========== Proceeds from sale of real ---------- estate investment................................. 3,749,308 Retirement of mortgage note payable.................. (2,094,135) ---------- Net cash proceeds.................................... $ 1,655,173 ========== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Since the sale of Pacesetter Apartments on March 17, 1994, the focus of the Partnership's efforts have been directed to the renovation program at Palm Bay Apartments (formerly known as Greentree Apartments). From the beginning of 1994 through the second quarter of 1995, the Partnership has completed capital renovation projects totaling $896,528. To date, occupancy at Palm Bay Apartments has not recovered as much as was hoped. At June 30, 1995, occupancy at Palm Bay Apartments stood at 72% down from 79% at March 31, 1995 and from 82% at December 31, 1994. As the capital renovation program winds down, the focus of the Partnership will turn to leasing the restored units and increasing operating efficiencies at the property. RESULTS OF OPERATIONS --------------------- The Partnership reported a loss of $87,417 for the first six months of 1995 compared to net income of $496,173 for the first six months of 1994. The results for the first six months of 1994 included a one-time gain of $574,701 from the sale of Pacesetter Apartments. Rental revenues and operating expenses were both lower for the six months ending June 30, 1995 because the 1995 figures do not include rental revenues or expenses of Pacesetter Apartments as do the 1994 figures. Unlike the year-to-date figures, the second quarter figures from both 1995 and 1994 contain only operating results from Palm Bay Apartments. The net loss for the second quarter of 1995 increased to $73,724 from the $56,223 loss for the second quarter of 1994. During the second quarter, Palm Bay expenses increased faster than did revenues from the property. Revenues: Rental revenues decreased $75,095 or 9.5% for the first six months of 1995 compared to the first six months of 1994. The decrease is entirely attributable to the sale of Pacesetter Apartments in March 1994. Rental revenue from Palm Bay Apartments increased $68,021 or 10.7%. For the second quarter, rental revenue from Palm Bay Apartments increased 8.7%. The Partnership was able to increase base rental rates due to the major capital improvements undertaken at Palm Bay Apartments. Besides improving the overall condition of the property, the capital improvements also restored approximately 70 out-of-service units to leasable condition. The increase in base rental rates was offset by a decrease in the occupancy rate. The occupancy rate at June 30, 1995 was 72%. The Partnership has not been able to increase occupancy rates or base rental rates as quickly as was hoped. Several apartment communities in the immediate area have also undergone major rehabilitation, and several of the competing apartment communities are able to offer their units at rates that have been subsidized by various government programs. The effect of the competition has restricted the increase in rental revenue that was otherwise expected from Palm Bay Apartments. Management is implementing various marketing strategies to attempt to improve the revenue growth of the property. Interest revenues increased to $6,354 for the six months ended June 30, 1995. The Partnership had substantially more funds invested in interest-bearing accounts due to the sale of Pacesetter Apartments in the first quarter of 1994. Revenues for 1994 also include the one-time gain on sale of Pacesetter Apartments. Expenses: Partnership expenses decreased $59,852 or 6.8% for the six months ended June 30, 1995. However, after excluding expenses pertaining to Pacesetter Apartments, expenses increased $115,952 or 19% for the six months ended June 30, 1995. Second quarter results, which do not include any expenses related to Pacesetter Apartments, show an increase in expenses of 43,837 or 11.5%. The increases at Palm Bay Apartments were concentrated in depreciation and repair and maintenance. The largest increase, on both an absolute and percentage basis, was the increase in depreciation expense. For the six months and the three months ended June 30, 1995 depreciation expense at Palm Bay Apartments increased $71,492 or 78% and $39,212 or 86%, respectively. The increase in depreciation expense is due to the continuing investment of Partnership resources into capital improvements. In the year since June 30, 1994, the Partnership has invested $773,795 in capital improvements. These capital improvements are generally being depreciated over lives ranging from five to ten years. Repair and maintenance expenses at Palm Bay Apartments increased $20,733 or 15.1% and $7,935 or 9.4%, respectively, for the six months and three months period ended June 30, 1995. Increases in repairs and maintenance expense are attributable to costs incurred preparing out-of-service units for rental. Repair and maintenance expenses will likely remain at a relatively high level until the occupancy rate at Palm Bay Apartments increases to an acceptable level. Property management fees for the six months and three months ended June 30, 1995 at Palm Bay Apartments increased $9,263 or 30% and $3,414 or 22%. An increase in rental receipts, upon which such fees are based, and an increase in the management fee percentage to 6% from 5% (effective January 1, 1995) were the reasons for the increase. Property tax expense decreased $29,475 for the six month ended June 30, 1995. Most of the decrease was due to the elimination of property taxes at Pacesetter Apartments. However, property taxes also decreased $10,002 or 14.5% at Palm Bay Apartments due to tax appeals by the Partnership to local taxing jurisdictions that resulted in lower assessments. The Partnership incurred reduced interest expense for the second quarter of 1995 compared to the second quarter of 1994. Again, the reason was the elimination of interest charges pertaining to the Pacesetter mortgage note. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash flows used in operating activities by the Partnership was $15,274 for the first six months of 1995, compared to $20,275 generated by operations for the first six months of 1994. Elimination of operations at Pacesetter Apartments immediately improved the operating cash flow of the Partnership during the second quarter of 1994. The Partnership anticipates that the capital renovation projects at Palm Bay Apartments will begin to yield improved cash flow from operations as the restored and refurbished units are leased to new tenants. However, cash flow from Palm Bay Apartments will not be sufficient to fund both operating expenses and debt service requirements until the occupancy rate of Palm Bay Apartments improves. For the balance of 1995, the Partnership will use its cash reserves to fund debt service requirements if cash from operations is insufficient. Cash paid to affiliates in 1995 includes an $81,000 brokerage commission, paid in January, related to the sale of Pacesetter Apartments in 1994. This item accounts for the $118,565 increase in cash paid to affiliates in 1995 compared to 1994. The sale of Pacesetter Apartments in March 1994, provided the largest change in the cash flows of the Partnership. Cash generated from the sale, after repayment of the Pacesetter mortgage note, totaled $1,655,173. The Partnership used these proceeds to fund capital improvements at Palm Bay Apartments and to improve the Partnership's cash reserves. Cash expended for capital improvements at Palm Bay Apartments increased to $248,758 for the second quarter of 1995 from $122,733 for the second quarter of 1994. The financing activities of the Partnership, aside from the March 1994 retirement of the Pacesetter mortgage note, consist of the repayment of the Palm Bay mortgage note through monthly debt service payments. These payments are scheduled to gradually increase until June 1997, when the Palm Bay mortgage note matures. Short Term Liquidity: Due to the sale of Pacesetter Apartments on March 17, 1994, the Partnership began 1995 with adequate cash reserves. A substantial portion of the proceeds from the sale of Pacesetter Apartments have been invested in capital improvements at Palm Bay Apartments. The Partnership has budgeted $302,000 of capital improvements for 1995 in addition to the $678,720 of capital improvements made during 1994 and 1993. The capital improvements at Palm Bay Apartments are necessary to allow the property to increase its rental revenues and become competitive in the Orlando sub-market where the property is located. At June 30, 1995, the Partnership held $736,635 of cash and cash equivalents, down $325,726 from the balance at the end of 1994. The Partnership will use its cash reserves, if necessary to complete the capital renovation projects at Palm Bay Apartments. The General Partner considers the Partnership's cash reserves adequate for such uses for the balance of 1995. Long Term Liquidity: For the long term, property operations will remain the primary source of funds. While the present outlook for the Partnership's liquidity is favorable, market conditions may change and property operations may deteriorate. The General Partner expects that the capital improvements at Palm Bay Apartments will yield improved cash flow from operations in 1995. The Partnership has budgeted an additional $53,000 of capital improvements for the balance of 1995. If the Partnership's cash position deteriorates, the General Partner may elect to defer certain of the capital improvements, except where such improvements are expected to increase the competitiveness or marketability of the Partnership's property. The General Partner has established a revolving credit facility not to exceed $5,000,000 in the aggregate which is available on a "first-come, first-served" basis to the Partnership and other affiliated partnerships if certain conditions are met. However, there is no assurance that the Partnership will receive additional funds under the facility because no amounts will be reserved for any particular partnership. As of June 30, 1995, $2,362,004 remained available for borrowing under the facility; however, additional funds could become available as other partnerships repay borrowings. As a additional source of liquidity, the General Partner may attempt to refinance the Palm Bay mortgage note. The General Partner estimates that such a refinancing could yield proceeds to the Partnership in excess of the amount needed to retire the current mortgage note. However, there can be no guarantee that the Partnership will be able to obtain such mortgage refinancing on terms or in amounts favorable to the Partnership, or that the cash proceeds from such refinancing could be timed to coincide with the liquidity needs of the Partnership. Distributions: Distributions to partners have been suspended as part of the General Partner's policy of maintaining adequate cash reserves. Distributions to Unit holders will remain suspended for the foreseeable future. The General Partner will continue to monitor the cash reserves and working capital needs of the Partnership to determine when cash flows will support distributions to the Unit holders. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION ------- ----------------- On an unsolicited basis, High River Limited Partnership ("High River"), a partnership controlled by Carl Icahn, announced that it has commenced an offer to purchase 6,189 units of limited partnership interest in the Partnership (approximately 45 percent of the Partnership's units) at $110 per unit. High River has stated that the offer is being made as "an investment." The tender offer is due to expire on August 31, 1995, unless extended. The General Partner, with assistance from its advisors, is in the process of evaluating the tender offer from a number of important standpoints and will report to the limited partners its position with respect to such offer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ------- -------------------------------- (a) Exhibits. Exhibit Number Description 3. Restated Certificate and Agreement of Limited Partnership dated of March 8, 1972. (1) 4. Amendment to Restated Certificate and Agreement of Limited Partnership dated March 30, 1992. (2) 11. Statement regarding computation of net income per limited partnership unit: Net income per limited partnership unit is computed by dividing net income allocated to the limited partners by the number of limited partnership units outstanding. Per unit information has been computed based on 13,752.5 and 13,757.5 limited partnership units outstanding in 1995 and 1994, respectively. 27. Financial Data Schedule for the quarter ended June 30, 1995. (1) Incorporated by reference to the Annual Report of Registrant on Form 10-K for the period ended December 31, 1990, as filed on March 29, 1991. (2) Incorporated by reference to the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on April 10, 1992. (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended June 30, 1995. McNEIL PACIFIC INVESTORS FUND 1972 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 PACIFIC INVESTORS FUND 1972 By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner August 14, 1995 By: /s/ Donald K. Reed -------------------- ------------------------------------------------------ Date Donald K. Reed President and Chief Executive Officer August 14, 1995 By: /s/ Robert C. Irvine -------------------- ------------------------------------------------------ Date Robert C. Irvine Chief Financial Officer of McNeil Investors, Inc. Principal Financial Officer August 14, 1995 By: /s/ Brandon K. Flaming -------------------- ------------------------------------------------------ Date Brandon K. Flaming Chief Accounting Officer of McNeil Real Estate Management, Inc.