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 0-15446 MCNEIL REAL ESTATE FUND XXV, L.P. ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) California 33-0120335 ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 700, LB70, Dallas, Texas, 75240 ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (214) 448-5800 --------------------------- Indicate by check mark whether the registrant, (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- MCNEIL REAL ESTATE FUND XXV, L.P. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ---------------------------- BALANCE SHEETS (Unaudited) June 30, December 31, 1995 1994 ---------- ---------- ASSETS ------ Real estate investments: Land..................................................... $ 5,524,462 $ 5,524,462 Buildings and improvements............................... 67,605,479 66,918,459 ---------- ---------- 73,129,941 72,442,921 Less: Accumulated depreciation and amortization......... (27,420,390) (25,759,358) ----------- ----------- 45,709,551 46,683,563 Cash and cash equivalents................................... 3,631,915 3,125,937 Cash segregated for security deposits....................... 291,620 283,793 Note receivable............................................. 344,225 344,225 Accounts receivable, net of allowance for doubtful accounts of $562,287 and $561,426 at June 30, 1995 and December 31, 1994, respectively................. 809,637 1,169,888 Escrow deposits............................................. 1,046,053 1,155,277 Deferred borrowing costs, net of accumulated amortization of $63,058 and $58,491 at June 30, 1995 and December 31, 1994, respectively................. 255,692 260,259 Prepaid expenses and other assets........................... 468,979 409,620 ----------- ---------- $ 52,557,672 $53,432,562 =========== ========== LIABILITIES AND PARTNERS' EQUITY (DEFICIT) ----------------------------------------- Mortgage note payable....................................... $ 7,381,507 $ 7,381,507 Accounts payable and accrued expenses....................... 190,758 175,019 Accrued interest............................................ 634,640 554,342 Accrued property taxes...................................... 442,170 858,300 Payable to affiliates - General Partner..................... 68,998 82,427 Land lease obligation....................................... 300,240 320,135 Deferred gain............................................... 348,340 348,340 Security deposits and deferred rental income................ 322,482 303,624 ----------- ---------- 9,689,135 10,023,694 ----------- ---------- Partners' equity (deficit): Limited partners - 84,000,000 limited partnership units authorized; 83,894,648 limited partnership units issued and outstanding at June 30,1995 and December 31, 1994....................................... 43,248,100 43,783,028 General Partner.......................................... (379,563) (374,160) ----------- ---------- 42,868,537 43,408,868 ----------- ---------- $52,557,672 $53,432,562 ========== ========== The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Revenue: Rental revenue................ $2,227,363 $2,128,617 $4,288,685 $4,288,672 Interest...................... 53,153 40,449 100,654 64,099 Gain on legal settlement...... 96,731 - 96,731 - --------- --------- --------- --------- Total revenue............... 2,377,247 2,169,066 4,486,070 4,352,771 --------- --------- --------- --------- Expenses: Interest...................... 205,888 208,011 412,314 407,325 Depreciation and amortization................ 804,535 768,494 1,661,032 1,536,428 Property taxes................ 237,294 199,557 422,328 398,709 Personnel costs............... 158,022 134,549 357,323 298,943 Utilities..................... 175,300 174,480 363,031 381,159 Repairs and maintenance....... 286,273 273,776 595,683 546,504 Property management fees - affiliates........... 145,980 157,885 267,363 279,929 Other property operating expenses.................... 229,385 198,259 437,306 399,801 General and administrative.... 30,903 27,749 55,773 54,254 General and administrative - affiliates.................. 230,243 217,306 454,248 435,776 --------- --------- --------- --------- Total expenses.............. 2,503,823 2,360,066 5,026,401 4,738,828 --------- --------- --------- --------- Net loss......................... $ (126,576) $ (191,000) $ (540,331) $ (386,057) ========= ========= ========= ========= Net loss allocable to limited partners........... $ (125,311) $ (189,090) $ (534,928) $ (382,196) Net loss allocable to General Partner............ (1,265) (1,910) (5,403) (3,861) --------- --------- --------- --------- Net loss......................... $ (126,576) $ (191,000) $ (540,331) $ (386,057) ========= ========= ========= ========= Net loss per thousand limited partnership units..... $ (1.49) $ (2.26) $ (6.38) $ (4.56) ========= ========= ========= ========= Distributions per thousand limited partnership units..... $ - $ - $ - $ 4.77 ========= ========= ========= ========= The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF PARTNERS' EQUITY (DEFICIT) (Unaudited) For the Six Months Ended June 30, 1995 and 1994 Total General Limited Partners' Partner Partners Equity --------- ---------- ---------- Balance at December 31, 1993.............. $(368,845) $44,709,417 $44,340,572 Net loss.................................. (3,861) (382,196) (386,057) Distributions............................. - (400,207) (400,207) -------- ---------- ---------- Balance at June 30, 1994.................. $(372,706) $43,927,014 $43,554,308 ======== ========== ========== Balance at December 31, 1994.............. $(374,160) $43,783,028 $43,408,868 Net loss.................................. (5,403) (534,928) (540,331) -------- ---------- ---------- Balance at June 30, 1995.................. $(379,563) $43,248,100 $42,868,537 ======== ========== ========== The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF CASH FLOWS (Unaudited) Increase in Cash and Cash Equivalents Six Months Ended June 30, --------------------------------- 1995 1994 --------- --------- Cash flows from operating activities: Cash received from tenants........................ $4,621,099 $4,740,780 Cash paid to suppliers............................ (1,845,969) (1,852,806) Cash paid to affiliates........................... (735,040) (722,955) Interest received................................. 100,654 64,099 Interest paid..................................... (327,449) (285,409) Property taxes paid and escrowed.................. (697,133) (449,277) Cash received from legal settlement............... 96,731 - --------- --------- Net cash provided by operating activities............ 1,212,893 1,494,432 --------- --------- Cash flows from investing activities: Additions to real estate investments.............. (687,020) (1,004,011) --------- --------- Cash flows from financing activities: Principal payments on mortgage note payable......................................... - (12,381) Payments on capitalized land lease obligation...................................... (19,895) (15,023) Distributions paid................................ - (400,207) --------- -------- Net cash used in financing activities................ (19,895) (427,611) --------- -------- Net increase in cash and cash equivalents............ 505,978 62,810 Cash and cash equivalents at beginning of period............................................ 3,125,937 2,759,887 --------- --------- Cash and cash equivalents at end of period........... $3,631,915 $2,822,697 ========= ========= The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF CASH FLOWS (Unaudited) Reconciliation of Net Loss to Net Cash Provided by Operating Activities Six Months Ended June 30, ------------------------------- 1995 1994 -------- -------- Net loss............................................. $(540,331) $ (386,057) -------- --------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization..................... 1,661,032 1,536,428 Amortization of deferred borrowing costs.......... 4,567 4,566 Amortization of deferred gain..................... - (21,035) Changes in assets and liabilities: Cash segregated for security deposits........... (7,827) (6,775) Note receivable................................. - 42,776 Accounts receivable, net........................ 360,251 459,501 Escrow deposits................................. 109,224 24,103 Prepaid expenses and other assets............... (59,359) (61,816) Accounts payable and accrued expenses........... 15,739 (132,140) Accrued interest................................ 80,298 117,349 Accrued property taxes.......................... (416,130) (92,813) Payable to affiliates - General Partner......... (13,429) (7,249) Security deposits and deferred rental income........................................ 18,858 17,594 --------- --------- Total adjustments............................. 1,753,224 1,880,489 --------- --------- Net cash provided by operating activities............ $1,212,893 $1,494,432 ========= ========= The financial information included herein has been prepared by management without audit by independent public accountants. See accompanying notes to financial statements. MCNEIL REAL ESTATE FUND XXV, L.P. Notes to Financial Statements June 30, 1995 (Unaudited) NOTE 1. ------ McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as Southmark Equity Partners II, Ltd., was organized on February 15, 1985 as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate commercial and residential properties. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 700, LB70, Dallas, Texas, 75240. In the opinion of management, the financial statements reflect all adjustments necessary for a fair presentation of the Partnership's financial position and results of operations. All adjustments were of a normal recurring nature. However, the results of operations for the six months ended June 30, 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 Real Estate Fund XXV, L.P., c/o McNeil Real Estate Management, Inc., Investor Services, 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240. NOTE 3. ------ Certain prior period amounts have been reclassified to conform to the current period presentation. NOTE 4. ------ The Partnership pays property management fees equal to 5% of the gross rental receipts for its residential property and 6% of gross rental receipts for its commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management services for the Partnership's residential and commercial properties and leasing services for its residential properties. McREMI may also choose to provide leasing services for the Partnership's commercial properties, in which case McREMI will receive property management fees from such commercial properties equal to 3% of the property's gross rental receipts plus leasing commissions based on the prevailing market rate for such services where the property is located. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. The Partnership is paying an asset management fee which is payable to the General Partner. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases subsequent to 1999. Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows: Six Months Ended June 30, ------------------------------- 1995 1994 ------- ------- Property management fees............................. $267,363 $279,929 Charged to general and administrative expense: Partnership administration........................ 149,804 135,142 Asset management fee.............................. 304,444 300,634 ------- ------- $721,611 $715,705 ======= ======= Payable to affiliates - General Partner at June 30, 1995 and December 31, 1994 consisted primarily of unpaid property management fees, Partnership general and administrative expenses and asset management fees and are due and payable from current operations. NOTE 5. ------ The Partnership filed claims with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court") against Southmark for damages relating to improper overcharges, breach of contract and breach of fiduciary duty. The Partnership settled these claims in 1991, and such settlement was approved by the Bankruptcy Court. An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April 14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in May 1995 the Partnership received in full satisfaction of its claims, $73,122 in cash, and common and preferred stock in the reorganized Southmark subsequently sold for $23,609, which amounts represent the Partnership's pro-rata share of Southmark assets available for Class 8 Claimants. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------ --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- FINANCIAL CONDITION ------------------- There has been no significant change in the operations of the Partnership's properties since December 31, 1994. The Partnership reported a net loss of $540,331 for the first six months of 1995 as compared to a net loss of $386,057 for the first six months of 1994. Revenues in 1995 were $4,486,070 as compared to $4,352,771 in 1994, while expenses increased to $5,026,401 from $4,738,828. Net cash provided by operating activities was $1,212,893 for the six months ended June 30, 1995, a change from $1,494,432 provided during the same six month period in 1994. The Partnership expended $687,020 for capital improvements and $19,895 for payments on the capitalized land lease obligation. The balance in cash and cash equivalents increased to $3,631,915 at June 30, 1995, a net increase of $505,978 from the balance at December 31, 1994. Harbour Club I Apartments has continued to experience financial difficulties. The cash flow from operations of the property has not been sufficient to fund necessary capital improvements and to make the required monthly debt service payments. Effective January 1, 1993, the Partnership ceased making regularly scheduled debt service and escrow payments. In lieu of the aforementioned payments, the Partnership is funding debt service with the excess cash flow of the property. The Partnership has been notified that the mortgage note payable is in default and that the servicing agent has assigned the mortgage to the Department of Housing and Urban Development ("HUD"). If the Partnership is unable to successfully cure the default, the mortgagee could declare the entire indebtedness due and proceed with foreclosure on the property or pursue other actions such as gaining control of the property or placing it in receivership. Harbour Club I is part of a four-phase apartment complex located in Belleville, Michigan. Phases II and III of the complex are also owned by partnerships of which McNeil Partners, L.P. is the general partner, while Phase IV is owned by University Real Estate Fund 12, Ltd. ("UREF 12"). McREMI had been managing all four phases of the complex until December 1992, when the property management agreement between McREMI and UREF 12 was canceled. The Partnership had previously applied for an additional loan from HUD for a significant capital improvement program that is essential to the operation of the property. During 1993, this loan was denied and management is developing an alternative plan for funding necessary capital improvements. RESULTS OF OPERATIONS --------------------- Revenue: Total revenue increased by $208,181 and $133,299 for the three and six months ended June 30, 1995, respectively, as compared to the same periods in 1994. The increase was due to an increase in rental revenue and a gain on legal settlement in the second quarter of 1995, as discussed below. Rental revenue for the three and six months ended June 30, 1995 increased by $98,746 and $13, respectively, as compared to the three and six months ended June 30, 1994. Rental revenue at Harbour Club I Apartments increased by approximately $73,000 as a result of an increase in occupancy from 89% at June 30, 1994 to 94% at June 30, 1995. This increase was offset by a decrease of approximately $66,000 in rental revenue at Kellogg Building, mainly in the first quarter of 1995. Kellogg Building was 100% leased through the first half of 1994. A large tenant vacated in late 1994 and the space was not released until the second quarter of 1995. Interest income earned on short-term investments of cash and cash equivalents increased by $12,704 and $36,555 for the three and six month periods ended June 30, 1995, respectively, as compared to the respective periods in 1994. The increase was due to greater average cash balances invested in these accounts during the first six months of 1995. The Partnership held $3.6 million of cash and cash equivalents at June 30, 1995 as compared to $2.8 million at June 30, 1994. In addition, there was an increase in interest rates earned on invested cash in 1995. As discussed in Item 1 - Note 5, in 1995 the Partnership received cash and common and preferred stock in the reorganized Southmark in settlement of its bankruptcy claims against Southmark. The Partnership recognized a $96,731 gain in the second quarter of 1995 as a result of this settlement. No such gain was recognized in 1994. Expenses: Total expenses increased by $143,757 and $287,573 for the three and six months ended June 30, 1995, respectively, as compared to the same periods in 1994. The increase was primarily due to an increase in depreciation and amortization expense and personnel expenses as discussed below. Depreciation and amortization increased by $36,041 and $124,604 for the three and six month periods ended June 30, 1995, respectively, in relation to the comparable period in 1994. The increase was primarily due to the addition of depreciable capital improvements at the Partnership's properties, the majority being at Kellogg and Fidelity Federal office buildings. Property taxes for the three and six month periods ended June 30, 1995 increased by $37,737 and $23,619, respectively, as compared to the same periods in 1994. The increase was due to an increase in the Partnership's property tax liability, the result of the Partnership obtaining parcels of land associated with Harbour Club I in a legal settlement in November 1994. Personnel costs increased by $23,473 and $58,380 for the three and six months ended June 30, 1995, respectively, in relation to the comparable periods in 1994. The increase was due to the addition of maintenance technicians at Northwest Plaza Shopping Center and Century Park Office Building. In addition, there was an increase in compensation paid to on-site employees at all of the properties in 1995. Repairs and maintenance expense increased by $12,497 and $49,179 for the first three and six months of 1995, respectively, as compared to the same periods in 1994. The increase was mainly due to the addition of a security patrol at Northwest Plaza Shopping Center and an increase in light bulbs and fixtures at Fidelity Federal Office Building. Other property operating expenses increased by $31,126 and $37,505 for the three and six month periods ended June 30, 1995, respectively, as compared to the same periods in 1994. The increase was mainly due to an increase in hazard insurance at Fidelity Federal Office Building in 1995. In addition, there was an increase in the amortization of leasing commissions at Century Park which were paid in prior years in an effort to increase the center's occupancy. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Partnership's primary source of cash flows is from operating activities which generated $1,212,893 of cash in the first six months of 1995 as compared to $1,494,432 for the same period in 1994. The decrease in cash provided by operating activities in 1995 was mainly the result of an increase in cash paid for delinquent property taxes in the first six months of 1995 on parcels of land adjacent to the Harbour Club I Apartments which were acquired by the Partnership in November 1994, as the result of a legal settlement. The Partnership expended $687,020 and $1,004,011 for capital additions to its real estate investments in the first six months of 1995 and 1994, respectively. The decrease in 1995 was mainly the result of the reduction of tenant improvements at Northwest Plaza in 1995. The Partnership distributed $400,207 to the limited partners in the six months ended June 30, 1994. No distributions were paid in the six months ended June 30, 1995. Short-term liquidity: -------------------- At June 30, 1995, the Partnership held cash and cash equivalents of $3,631,915. This balance provides a reasonable level of working capital for the Partnership's immediate needs in operating its properties. For the remainder of 1995, Partnership properties are expected to provide positive cash flow from operations after payment of debt service and capital improvements. Only one property, Harbour Club I Apartments, is encumbered with mortgage debt and another property, Fidelity Plaza, is encumbered with lease obligations. The Partnership has budgeted $2,398,000 for necessary capital improvements for all properties in 1995 which is expected to be funded from available cash reserves or from operations of the properties. An escrow account restricted to the funding of priority capital needs is held by the lender for Harbour Club I in the amount of $491,197, which is included in escrow deposits on the Balance Sheets. However, since the loan is in default, draws from the escrow account for capital needs are not permitted. The present cash balance is believed to provide an adequate reserve for property operations. At the present time, the Partnership does not anticipate making distributions to the limited partners in 1995. There can be no assurance as to when the Partnership will rebuild cash reserves judged adequate to resume distributions to the partners. Long-term liquidity: ------------------- While the outlook for maintenance of adequate levels of liquidity is favorable, should operations deteriorate and present cash resources become insufficient to fund current needs, the Partnership would require other sources of working capital. No such sources have been identified. The Partnership has no established lines of credit from outside sources. Other possible actions to resolve cash deficiencies include refinancings, deferral of capital expenditures on Partnership properties except where improvements are expected to increase the competitiveness and marketability of the properties, arranging financing from affiliates or the ultimate sale of the properties. Sales and refinancings are possibilities only, and there are at present no plans for any such sales or refinancings. The General Partner has established a revolving credit facility not to exceed $5,000,000 in the aggregate which is available on a "first-come, first-served" basis to the Partnership and other affiliated partnerships if certain conditions are met. Borrowings under the facility may be used to fund deferred maintenance, refinancing obligations and working capital needs. There is no assurance that the Partnership will receive any funds under the facility because no amounts are reserved for any particular partnership. As of June 30, 1995, $2,362,004 remained available for borrowing under the facility; however, additional funds could become available as other partnerships repay existing borrowings. 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 37,755,237 units of limited partnership interest in the Partnership (approximately 45% of the Partnership's units) at $0.24 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 ------- ----------- 4. Amended and Restated Limited Partnership Agreement dated March 26, 1992. (Incorporated by reference to the Current Report of the registrant on Form 8-K dated March 26, 1992, as filed on April 9, 1992). 4.1 Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXV, L.P. dated June 1995. 11. Statement regarding computation of Net Loss per Thousand Limited Partnership Units: Net loss per thousand limited partnership units is computed by dividing net loss allocated to the limited partners by the weighted average number of limited partnership units outstanding expressed in thousands. Per thousand unit information has been computed based on 83,895 and 83,901 weighted average thousand limited partnership units outstanding in 1995 and 1994, respectively. (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended June 30, 1995. MCNEIL REAL ESTATE FUND XXV, L.P. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: McNEIL REAL ESTATE FUND XXV, L.P. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner August 14, 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/ Carol A. Fahs ----------------------------- -------------------------------------- Date Carol A. Fahs Chief Accounting Officer of McNeil Real Estate Management, Inc.