-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RPZiKBU2rSkdF33Bi31yLxSUbeNbYUOL4gMB9qFBJcl6Y6QdlBrQQ3dJxGtzwQin SzTgQlPkJdplMpFdaOlqnA== 0000750334-99-000008.txt : 19990402 0000750334-99-000008.hdr.sgml : 19990402 ACCESSION NUMBER: 0000750334-99-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCNEIL REAL ESTATE FUND XX L P CENTRAL INDEX KEY: 0000750334 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330050225 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14007 FILM NUMBER: 99580699 BUSINESS ADDRESS: STREET 1: 13760 NOEL RD STE 600 LB70 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9724485800 MAIL ADDRESS: STREET 1: 13760 NOEL ROAD SUITE 600 LB 70 STREET 2: 13760 NOEL ROAD SUITE 600 LB 70 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHMARK INCOME INVESTORS LTD DATE OF NAME CHANGE: 19920413 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ---------------------------------------------- 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 0-14007 ---------- McNEIL REAL ESTATE FUND XX, L.P. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 33-0050225 - -------------------------------------------------------------------------------- (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 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited partnership units - ---------------------------------------------------------- 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___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 49,507.5 of the registrant's 49,512 outstanding limited partnership units are held by non-affiliates. The aggregate market value of units held by non-affiliates is not determinable since there is no public trading market for limited partnership units and transfers of units are subject to certain restrictions. Documents Incorporated by Reference: See Item 14, Page 34 TOTAL OF 36 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XX, L.P. (the "Partnership"), formerly known as Southmark Income Investors, Ltd., was organized on July 19, 1984 as a limited partnership under the provisions of the California Revised Limited Partnership Act to invest in, hold, manage and dispose of mortgage loans, real estate and real estate-related investments. 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 General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 30, 1992, the general partner of the Partnership was Southmark Investment Group, Inc. (the "Original General Partner"), a Nevada corporation and a wholly-owned subsidiary of Southmark Corporation ("Southmark"). The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. On September 28, 1984, the Partnership registered with the Securities and Exchange Commission under the Securities Act of 1933 (File No. 2-92376) and commenced a public offering for the sale of $30,000,000 of limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the holders thereof to participate in certain allocations and distributions of the Partnership. The sale of Units closed on September 27, 1985, with 49,528 Units sold at $500 each, or gross proceeds (net of discounts of $57,546) of $24,706,454 to the Partnership. In 1994 and 1993, 12 and 4 Units were relinquished, respectively, leaving 49,512 Units outstanding at December 31, 1998. SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - -------------------------------------------------- On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General Partner nor the Original General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Original General Partner, were sold or liquidated for the benefit of creditors. In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio. On February 14, 1991, pursuant to the asset purchase agreement as amended on that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates and commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates. On March 30, 1992, the limited partners approved a restructuring proposal that provided for (i) the replacement of the Original General Partner with a new general partner, McNeil Partners, L.P.; (ii) the adoption of the Amended Partnership Agreement which substantially alters the provisions of the original partnership agreement relating to, among other things, compensation, reimbursement of expenses and voting rights; (iii) the approval of an amended property management agreement with McREMI, the Partnership's property manager; and (iv) the approval to change the Partnership's name to McNeil Real Estate Fund XX, L.P. Under the Amended Partnership Agreement, the Partnership began accruing an asset management fee, retroactive to February 14, 1991, which is payable to the General Partner. For a discussion of the methodology for calculating the asset management fee, see Item 13 Certain Relationships and Related Transactions. The proposals approved at the March 30, 1992 meeting were implemented as of that date. Concurrent with the approval of the restructuring, the General Partner acquired from Southmark and its affiliates, for aggregate consideration of $5,441, the general partner interest of the Original General Partner. The General Partner and its affiliates own in the aggregate less than 1% of the Units. CURRENT OPERATIONS - ------------------ General: The Partnership has been engaged in the servicing of mortgage loans, including equity and revenue participation loans, and the ownership, operation and management of revenue-producing properties acquired through foreclosure. In July 1990, the Partnership foreclosed on Park Spring Apartments (renamed Sterling Springs Apartments) in settlement of the related mortgage loan. In September 1991, the Partnership foreclosed on Holiday Inn - Jacksonville (renamed Cherokee Inn) in partial settlement of the related mortgage loan and later sold the property in January 1993. In May 1993, the Partnership foreclosed on 1130 Sacramento Condominiums in settlement of the related mortgage loan and later sold the property in August 1997. In 1998, the Partnership's mortgage loan investments secured by Idlewood and Lakeland nursing homes and the Partnership's mortgage loan investments affiliate secured by Fort Meigs Plaza were repaid in full by the respective borrowers. At December 31, 1998, the Partnership operated one revenue-producing property as described in Item 2 - Properties. The Partnership does not directly employ any personnel. The General Partner conducts the business of the Partnership directly and through its affiliates. The Partnership reimburses affiliates of the General Partner for such services rendered in accordance with the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions With Affiliates." The business of the Partnership to date has involved only one industry segment. See Item 8 - Financial Statements and Supplementary Data. The Partnership has no foreign operations. The business of the Partnership is not seasonal. Business Plan: As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. Competitive Conditions: Since the principal business of the Partnership is to own and operate real estate acquired through foreclosure, the Partnership is subject to certain of the risks incidental to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic or rent controls. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changed circumstances. The Partnership competes with numerous established companies, private investors (including foreign investors), real estate investment trusts, limited partnerships and other entities (many of which have greater resources than the Partnership) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosure of the Partnership's property, is described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 2 - Properties for a discussion of the competitive conditions at the Partnership's property. 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 December 31, 1998. 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 the sale or refinancing of its property and respond to changing economic and competitive factors. Environmental Matters: Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described above, Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. Other Information: In August 1995, High River Limited Partnership ("High River"), a Delaware limited partnership controlled by Carl C. Icahn, announced that it had commenced an unsolicited tender to purchase from holders of Units up to approximately 45% of the outstanding Units of the Partnership for a purchase price of $100 per Unit. In September 1996, High River made another unsolicited tender offer to purchase any and all of the outstanding Units of the Partnership for a purchase price of $170.38 per Unit. In addition, High River made unsolicited tender offers for certain other partnerships controlled by the General Partner. The Partnership recommended that the limited partners reject the tender offers made with respect to the Partnership and not tender their Units. The General Partner believes that as of February 1, 1999, High River has purchased 13.1% of the outstanding Units pursuant to the tender offers. In addition, all litigation filed by High River, Mr. Icahn and his affiliates in connection with the tender offers has been dismissed without prejudice. ITEM 2. PROPERTY - ------- -------- The following table sets forth the real estate investment of the Partnership at December 31, 1998. The buildings and the land on which the property is located are owned by the Partnership in fee, subject to a first lien deed of trust as set forth more fully in Item 8 - Note 7 - "Mortgage Note Payable." See also Item 8 - Note 4 - "Real Estate Investment" and Schedule III - Real Estate Investment and Accumulated Depreciation. In the opinion of management, the property is adequately covered by insurance.
Net Basis 1998 Date Property Description of Property Debt Property Taxes Acquired - -------- ----------- ----------- ---- -------------- -------- Sterling Springs Apartments Austin, TX 172 units $ 2,848,199 $ 2,613,312 $ 142,490 7/90 ========== ========== ========
Sterling Springs Apartments is owned by Sterling Springs Fund XX Limited Partnership, which is wholly-owned by the Partnership. The following table sets forth the property's occupancy rate and rent per square foot for the last five years:
1998 1997 1996 1995 1994 ------------- ------------- -------------- ------------- ------- Sterling Springs Occupancy Rate............ 97% 97% 91% 99% 95% Rent Per Square Foot...... $9.94 $9.50 $9.28 $9.10 $8.37
Occupancy rate represents all units leased divided by the total number of units of the property as of December 31 of the given year. Rent per square foot represents all revenue, except interest, derived from the property's operations divided by the leasable square footage of the property. Competitive Conditions - ---------------------- Sterling Springs - ---------------- Sterling Springs is a 172-unit garden-style apartment community located in the southwest area of Austin, Texas. A large number of competing apartment units were built over the past several years. Additional construction is projected for 1999, including a 440-unit community directly across the street from the property. Sterling Springs' occupancy rate and rental rates are competitive with apartment communities in the area, however occupancy rates are expected to decline in 1999 as more apartment communities are built. The Partnership anticipates average occupancy will be in the low to mid 90% range in 1999 by upgrading vacant units and offering discounts and concessions to attract and maintain tenants. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Partnership is not party to, nor is the Partnership's property the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: 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. 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. 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. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. 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. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND - ------- ------------------------------------------------------------ RELATED SECURITY HOLDER MATTERS ------------------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. (B) Title of Class Number of Record Unit Holders Limited partnership units 4,185 as of February 1, 1999 (C) In 1998, the Partnership distributed $7,232,590 to the limited partners, $5,562,896 of which was cash proceeds from the payoff of the Idlewood Nursing Home mortgage loan investment and the Fort Meigs Plaza mortgage loan investment - affiliate. The remaining $1,669,694 was cash from operations. The Partnership distributed $3,249,987 to the limited partners in 1997, of which $1,750,000 was cash proceeds from the sale of 1130 Sacramento Condominiums and the remaining $1,499,987 was cash from operations. No distributions were paid to the General Partner in 1998 or 1997. During the last week of March 1999, the Partnership distributed approximately $1,500,200 to the limited partners of record as of March 1, 1999. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies - Distributions." ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data.
Statements of Years Ended December 31, Operations 1998 1997 1996 1995 1994 - ------------------ ------------- ------------- -------------- ------------- ------------- Rental revenue............... $ 1,290,193 $ 1,279,458 $ 1,413,050 $ 1,405,346 $ 1,172,233 Interest income.............. 516,148 539,573 524,791 568,970 591,791 Gain on extinguishment of mortgage loan investment................ 1,025,833 - - - - Gain on disposition of real estate ................... - 1,962,280 - - - Net income................... 1,258,637 2,239,792 116,736 64,116 88,909 Net income per limited partnership unit.......... $ 25.17 $ 44.78 $ 2.33 $ 1.28 $ 1.78 ============ ============ =========== ============ ============ Distributions per limited partnership unit.......... $ 146.08 $ 65.64 $ 24.24 $ 5.05 $ 5.05 ============ ============ =========== ============ ============ As of December 31, Balance Sheets 1998 1997 1996 1995 1994 - ------------------ ------------- ------------- -------------- ------------- ------------- Real estate investments, net... $ 2,848,199 $ 2,983,609 $ 5,457,587 $ 5,726,377 $ 5,938,194 Mortgage loan investments, net......................... - 6,868,788 4,138,453 4,271,336 4,418,306 Total assets................... 6,225,467 12,112,244 13,189,106 14,345,949 14,484,111 Mortgage note payable, net..... 2,613,312 2,666,814 2,715,909 2,760,961 2,802,303 Partners' equity............... 3,012,266 8,986,219 9,996,414 11,079,628 11,265,513
See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. In May 1993, the Partnership foreclosed on 1130 Sacramento Condominiums in settlement of the mortgage loan secured by the property and later sold the property in August 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- FINANCIAL CONDITION - ------------------- The Partnership was formed to engage in the business of making and servicing mortgage loans and acquiring, operating and ultimately disposing of revenue-producing real properties. In July 1990, the Partnership foreclosed on Park Springs Apartments (renamed Sterling Springs Apartments) in Austin, Texas, in settlement of the mortgage loan secured by the property. In September 1991, the Partnership foreclosed on Holiday Inn - Jacksonville (renamed Cherokee Inn) in Jacksonville, Texas, in partial settlement of the mortgage loan secured by the property and later sold the property in January 1993. In May 1993, the Partnership foreclosed on 1130 Sacramento Condominiums in settlement of the mortgage loan secured by the property and later sold the property in August 1997. In August 1992, pursuant to a lawsuit settlement, a mortgage loan investment, which was secured by a property owned by an affiliate of the General Partner, was transferred to the Partnership. In June 1993, a new loan agreement was executed; and the affiliate substituted a second lien on another of its properties, Fort Meigs Plaza Shopping Center, as the collateral on the loan. The first lien mortgage note secured by Fort Meigs Plaza, which was owned by an unaffiliated lender, matured in December 1997. In order to prevent foreclosure of the property by the first lienholder and to protect its second lien interest in the property, the Partnership purchased the first lien in December 1997. The first and second lien mortgage loan investments - affiliate secured by Fort Meigs Plaza matured in March 1998 and September 1997, respectively, and were repaid in April 1998 when the property was sold. The Partnership's mortgage loan investments secured by Idlewood and Lakeland nursing homes were repaid in full by the respective borrowers in 1998. At December 31, 1998, the Partnership operated one revenue-producing property which was acquired through foreclosure. RESULTS OF OPERATIONS - --------------------- 1998 compared to 1997 Revenue Total revenue decreased by $949,137 in 1998 as compared to 1997. The decrease was mainly due to a gain on disposition of real estate recognized in 1997, partially offset by a gain on extinguishment of mortgage loan investment in 1998, as discussed below. In 1998, rental revenue increased slightly by $10,735 as compared to 1997. Rental revenue at Sterling Springs Apartments increased in 1998 due to an increase in rental rates and a decrease in discounts and concessions given to tenants. This increase was partially offset by a decrease in rental revenue due to the sale of 1130 Sacramento Condominiums in 1997. 1130 Sacramento contributed approximately $90,400 of the rental revenue in 1997. Interest income on mortgage loan investments decreased by $99,151 in 1998 as compared to 1997. The decrease was due to the Lakeland Nursing Home mortgage loan investment being paid off by the borrower in August 1998. Although the Idlewood Nursing Home mortgage loan investment was also paid off in 1998, no interest was accrued on this loan in 1998 or 1997. In 1993, the Partnership acquired a second lien loan on a property owned by an affiliate. The Partnership purchased the first lien loan on this property in December 1997. Both loans were repaid by the affiliate borrower in April 1998. Interest income on mortgage loan investments - affiliate increased by $30,834 in 1998 as compared to 1997. Interest in 1997 included interest on the second lien only and 1998 includes interest on both the first and second lien loans. Other interest income increased by $44,892 in 1998 as compared to the same period in 1997. The increase was the result of an increase in cash available for short-term investment due to payoff of the Partnership's mortgage loan investments and mortgage loan investments - affiliate during the second and third quarters of 1998. In the second quarter of 1998, the Partnership recognized a $1,025,833 gain on extinguishment of mortgage loan investment related to the payoff of the Idlewood Nursing Home loan. The gain represents the cash payoff received in excess of the book value of the mortgage loan investment. On August 1, 1997, the Partnership sold one of four units of 1130 Sacramento Condominiums to an unaffiliated purchaser. The remaining three units were sold to the same purchaser on August 28, 1997. The cash purchase price for all four units was $4,700,000. The Partnership recognized a gain on disposition of real estate of $1,962,280 as more fully discussed in Item 8, Note 4 - "Real Estate Investment." Expenses: Total expenses increased by $32,018 in 1998 as compared to 1997. The increase was mainly due to an increase in general and administrative expenses, partially offset by an approximately $81,000 decrease in expenses due to the sale of 1130 Sacramento in 1997, as discussed below. In 1998, property taxes and repairs and maintenance expense decreased by $18,661 and $26,643, respectively, mainly due to the sale of 1130 Sacramento in 1997. Other property operating expenses decreased by $16,964 in 1998 as compared to 1997. The decrease was mainly due to a $10,000 deductible paid by the Partnership in 1997 for two minor tenant claims settled by the Partnership's insurance carrier. The remaining decrease was attributable to 1130 Sacramento, which was sold in 1997. General and administrative expenses increased by $136,774 in 1998 as compared to 1997. The increase was mainly due to costs incurred to explore alternatives to maximize the value of the Partnership (see Liquidity and Capital Resources). General and administrative expenses - affiliates decreased by $43,505 in 1998 as compared to 1997. The decrease was due to a decline in the tangible asset value of the Partnership, on which the fees are based, due to the payoff of the Partnership's mortgage loan investments and mortgage loan investments - affiliate in 1998 and the sale of 1130 Sacramento in 1997. 1997 compared to 1996 Revenue: Total revenue increased by $1,826,407 in 1997 as compared to 1996. The increase was mainly due to a gain on the sale of 1130 Sacramento, partially offset by a decrease in rental revenue as discussed below. Rental revenue decreased by $133,592 in 1997 in relation to 1996, mainly due to the decrease in rental revenue at 1130 Sacramento Condominiums. One of the four condominium units was vacated in April 1997 and was sold at the beginning of August 1997. The remaining three units were sold at the end of August 1997. As further discussed in Item 8 - Note 6 - "Mortgage Loan Investments - Affiliate," in 1993, the Partnership acquired a second lien loan on a property owned by an affiliate. The Partnership purchased the first lien loan on this property in December 1997. The purchase of the first lien at the end of 1997 resulted in a $15,824 increase in interest income on mortgage loan investments - affiliate in 1997 as compared to 1996. On August 1, 1997, the Partnership sold one of four units of 1130 Sacramento Condominiums to an unaffiliated purchaser. The remaining three units were sold to the same purchaser on August 28, 1997. The cash purchase price for all four units was $4,700,000. The Partnership recognized a gain on disposition of real estate of $1,962,280 as more fully discussed in Item 8 - Note 4 - "Real Estate Investment." In 1996, the Partnership received $17,063 in refunds of prior years' property taxes for 1130 Sacramento Condominiums. The assessed taxable value of the property was reduced by taxing authorities as a result of an appeal filed on behalf of the property. No such refund was received in 1997. Expenses: Total expenses decreased by $296,649 in 1997 as compared to 1996. The decrease was mainly due to a decrease in depreciation expense, general and administrative expenses and general and administrative - affiliates, as discussed below. Depreciation expense in 1997 decreased by $96,814 in relation to 1996. The decrease was due to 1130 Sacramento Condominiums being classified as an asset held for sale by the Partnership effective April 15, 1997. In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Partnership ceased recording depreciation on the asset at the time it was placed on the market for sale. General and administrative expenses decreased by $135,923 in 1997 as compared to 1996. The decrease was mainly due to a decrease in costs incurred relating to evaluation and dissemination of information regarding an unsolicited tender offer. This decrease was partially offset by approximately $26,000 of costs incurred for investor services, which were paid to an unrelated third party in 1997. In 1996, such costs were paid to an affiliate of the General Partner and were included in general and administrative - affiliates on the Statements of Operations. In 1997, general and administrative - affiliates decreased by $46,690 as compared to 1996. The decrease was mainly due to a decrease in overhead expenses allocated to the Partnership by McREMI due to investor services being performed by an unrelated third party in 1997, as discussed above. In addition, there was a decrease in asset management fees due to a decline in the tangible asset value of the Partnership, on which the fees are based. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Partnership generated $765,353 through operating activities in 1998 as compared to $487,912 in 1997 and $453,978 in 1996. The Partnership expended $98,849, $178,235 and $73,183 for capital improvements to its properties in 1998, 1997 and 1996, respectively. 1997 includes costs incurred for exterior carpentry and painting at Sterling Springs Apartments. In 1997, the Partnership received $4,493,834 of proceeds from the sale of 1130 Sacramento Condominiums. $2,996,176 of the proceeds was used to purchase a first lien mortgage loan investment secured by a property owned by an affiliate. The Partnership made this investment to protect its second lien interest in this property. The Partnership distributed $7,232,590 to the limited partners in 1998, of which $5,562,896 was cash proceeds from the payoff of the Idlewood Nursing Home mortgage loan investment and the Fort Meigs Plaza mortgage loan investment - affiliate. The remaining $1,669,694 was cash from operations. The Partnership distributed $3,249,987 to the limited partners in 1997, of which $1,750,000 was cash proceeds from the sale of 1130 Sacramento Condominiums and the remaining $1,499,987 was cash from operations. In 1996, the Partnership distributed $1,199,950 to the limited partners from cash from operations. Short-term liquidity: At December 31, 1998, the Partnership held cash and cash equivalents of $3,070,785. This balance provides a reasonable level of working capital for the Partnership's immediate needs in operating its property. In 1999, operation of Sterling Springs Apartments is expected to provide sufficient positive cash flow for normal operations. Management will perform routine repairs and maintenance on the property to preserve and enhance its value and competitiveness in the market. The Partnership has budgeted approximately $74,000 for capital improvements to Sterling Springs in 1999, which is expected to be funded from operations of the property. Additional efforts to maintain and improve Partnership liquidity have included continued attention to property management activities. The objective has been to obtain maximum occupancy rates while holding expenses to levels necessary to maximize cash flows. The Partnership has made capital expenditures on its property where improvements were expected to increase the competitiveness and marketability of the property. Under the terms of its Amended Partnership Agreement, the Partnership pays a disposition fee to an affiliate of the General Partner equaling up to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties, provided, however, that in no event shall all real estate commissions (including the disposition fee) paid to all persons exceed the amount customarily charged in similar arms-length transactions. The fee is due and payable at the time the sale closes. The Partnership incurred $124,500 of such fees during 1997 in connection with the sale of 1130 Sacramento Condominiums. This amount represents 2.65% of the gross sales price. These fees were paid by the Partnership subsequent to December 31, 1998 and are included in payable to affiliates on the Balance Sheets at December 31, 1998 and 1997. During the last week of March 1999, the Partnership distributed approximately $1,500,200 to the limited partners of record as of March 1, 1999. Long-term liquidity: The Partnership's property, Sterling Springs Apartments, is encumbered with mortgage debt. The mortgage is not due until 2003. While the outlook for maintenance of adequate levels of liquidity is favorable, should operations deteriorate and present cash resources be insufficient for current needs, the Partnership would require other sources of working capital. Possible actions to resolve cash deficiencies include refinancings, deferral of capital expenditures on the Partnership's property except where improvements are expected to increase the competitiveness and marketability of the property, arranging financing from affiliates or the ultimate sale of the property. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. 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 are 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. Management will complete assessment of findings by May 1, 1999. 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. Contingency plans - ----------------- Management is developing contingency plans to address potential year 2000 non-compliance of IT and embedded technology systems. Management believes that failure of any IT system could have an adverse impact on operations. However, management believes that alternative systems are available that could be utilized to minimize such impact. Management believes that any failure in the embedded technology systems could have an adverse impact on that property's performance. Management will assess these risks and develop plans to mitigate possible failures by June, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ---------------------------------------------------------- Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
Page Number -------- INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 14 Balance Sheets at December 31, 1998 and 1997................................... 15 Statements of Operations for each of the three years in the period ended December 31, 1998..................................................... 16 Statements of Partners' Equity (Deficit) for each of the three years in the period ended December 31, 1998.............................................. 17 Statements of Cash Flows for each of the three years in the period ended December 31, 1998..................................................... 18 Notes to Financial Statements.................................................. 20 Financial Statement Schedule - Schedule III - Real Estate Investment and Accumulated Depreciation............................................................. 29
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of McNeil Real Estate Fund XX, L.P.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XX, L.P. (a California limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XX, L.P. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Dallas, Texas March 19, 1999 McNEIL REAL ESTATE FUND XX, L.P. BALANCE SHEETS
December 31, --------------------------------- 1998 1997 ------------ ------------ ASSETS - ------ Real estate investment: Land .......................................................... $ 392,000 $ 392,000 Buildings and improvements .................................... 3,981,407 3,882,558 ------------ ------------ 4,373,407 4,274,558 Less: Accumulated depreciation ............................... (1,525,208) (1,290,949) ------------ ------------ 2,848,199 2,983,609 Mortgage loan investments, net of allowance of $792,013 at December 31, 1997 ................................. -- 3,268,712 Mortgage loan investments - affiliate, net of allowance of $130,000 at December 31, 1997 ................................. -- 3,600,076 Cash and cash equivalents ........................................ 3,070,785 1,824,293 Cash segregated for security deposits ............................ 28,773 27,405 Interest and other accounts receivable ........................... 6,603 140,025 Escrow deposits .................................................. 180,267 162,652 Deferred borrowing costs, net of accumulated amortization of $76,154 and $60,222 at December 31, 1998 and 1997, respectively ...................... 85,340 101,272 Prepaid expenses and other assets ................................ 5,500 4,200 ------------ ------------ $ 6,225,467 $ 12,112,244 ============ ============ LIABILITIES AND PARTNERS' EQUITY (DEFICIT) - ------------------------------------------ Mortgage note payable, net ....................................... $ 2,613,312 $ 2,666,814 Accounts payable and other accrued expenses ...................... 52,848 61,994 Accrued property taxes ........................................... 142,490 137,050 Payable to affiliates ............................................ 376,849 203,444 Deferred revenue ................................................. -- 27,229 Security deposits and deferred rental revenue .................... 27,702 29,494 ------------ ------------ 3,213,201 3,126,025 ------------ ------------ Partners' equity (deficit): Limited partners - 60,000 limited partnership units authorized; 49,512 limited partnership units issued and outstanding at December 31, 1998 and 1997 ............... 3,296,145 9,282,684 General Partner ............................................... (283,879) (296,465) ------------ ------------ 3,012,266 8,986,219 ------------ ------------ $ 6,225,467 $ 12,112,244 ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XX, L.P. STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Revenue: Rental revenue ........................... $1,290,193 $1,279,458 $1,413,050 Interest income on mortgage loan investments ............................ 180,872 280,023 283,010 Interest income on mortgage loan investments - affiliate ................ 108,214 77,380 61,556 Other interest income .................... 227,062 182,170 180,225 Gain on extinguishment of mortgage loan investment ........................ 1,025,833 -- -- Gain on disposition of real estate ....... -- 1,962,280 -- Property tax refund ...................... -- -- 17,063 ---------- ---------- ---------- Total revenue .......................... 2,832,174 3,781,311 1,954,904 ---------- ---------- ---------- Expenses: Interest ................................. 243,328 246,782 249,920 Depreciation ............................. 234,259 245,159 341,973 Property taxes ........................... 142,490 161,151 170,597 Personnel costs .......................... 158,653 144,376 142,069 Repairs and maintenance .................. 103,831 130,474 134,645 Property management fees - affiliates ............................. 61,789 63,072 67,381 Utilities ................................ 83,795 81,418 83,481 Other property operating expenses ........ 75,390 92,354 88,756 General and administrative ............... 250,749 113,975 249,898 General and administrative - affiliates ............................. 219,253 262,758 309,448 ---------- ---------- ---------- Total expenses ......................... 1,573,537 1,541,519 1,838,168 ---------- ---------- ---------- Net income .................................. $1,258,637 $2,239,792 $ 116,736 ========== ========== ========== Net income allocable to limited partners ................................. $1,246,051 $2,217,394 $ 115,569 Net income allocable to General Partner .................................. 12,586 22,398 1,167 ---------- ---------- ---------- Net income .................................. $1,258,637 $2,239,792 $ 116,736 ========== ========== ========== Net income per limited partnership unit ..................................... $ 25.17 $ 44.78 $ 2.33 ========== ========== ========== Distributions per limited partnership unit ......................... $ 146.08 $ 65.64 $ 24.24 ========== ========== ==========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XX, L.P. STATEMENTS OF PARTNERS' EQUITY (DEFICIT) For the Years Ended December 31, 1998, 1997 and 1996
Total General Limited Partners' Partner Partners Equity ------------- ------------- ------------- Balance at December 31, 1995 ............ $ (320,030) $ 11,399,658 $ 11,079,628 Net income .............................. 1,167 115,569 116,736 Distributions to limited partners........ -- (1,199,950) (1,199,950) ------------ ------------ ------------ Balance at December 31, 1996 ............ (318,863) 10,315,277 9,996,414 Net income .............................. 22,398 2,217,394 2,239,792 Distributions to limited partners ....... -- (3,249,987) (3,249,987) ------------ ------------ ------------ Balance at December 31, 1997 ............ (296,465) 9,282,684 8,986,219 Net income .............................. 12,586 1,246,051 1,258,637 Distributions to limited partners ....... -- (7,232,590) (7,232,590) ------------ ------------ ------------ Balance at December 31, 1998 ............ $ (283,879) $ 3,296,145 $ 3,012,266 ============ ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XX, L.P. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Cash received from tenants ................ $ 1,324,552 $ 1,259,654 $ 1,422,803 Cash paid to suppliers .................... (686,225) (607,269) (723,975) Cash paid to affiliates ................... (107,637) (287,848) (368,716) Interest received ......................... 423,419 455,833 456,845 Interest received from affiliate .......... 184,958 48,886 48,886 Interest paid ............................. (219,330) (224,165) (228,625) Property taxes paid ....................... (281) (24,101) (50,954) Property taxes escrowed ................... (154,103) (133,078) (119,349) Property tax refund received .............. -- -- 17,063 ----------- ----------- ----------- Net cash provided by operating activities ................................ 765,353 487,912 453,978 ----------- ----------- ----------- Cash flows from investing activities: Additions to real estate investments ............................. (98,849) (178,235) (73,183) Collection of principal on mortgage loan investments ............... 53,364 135,841 132,883 Proceeds from payoff of mortgage loan investments ........................ 4,241,181 -- -- Collection of principal on mortgage loan investments - affiliate ............ 9,126 -- -- Proceeds from payoff of mortgage loan investments - affiliate ............ 3,570,896 Purchase of mortgage loan investment - affiliate .................. -- (2,996,176) -- Proceeds from disposition of real estate .................................. -- 4,493,834 -- ----------- ----------- ----------- Net cash provided by investing activities .............................. 7,775,718 1,455,264 59,700 ----------- ----------- ----------- Cash flows from financing activities: Principal payments on mortgage note payable ............................ (61,989) (57,153) (52,694) Distributions to limited partners ......... (7,232,590) (3,249,987) (1,199,950) ----------- ----------- ----------- Net cash used in financing activities ........ (7,294,579) (3,307,140) (1,252,644) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents .......................... 1,246,492 (1,363,964) (738,966) Cash and cash equivalents at beginning of year ......................... 1,824,293 3,188,257 3,927,223 ----------- ----------- ----------- Cash and cash equivalents at end of year ................................... $ 3,070,785 $ 1,824,293 $ 3,188,257 =========== =========== ===========
See discussion of non-cash investing activities in Note 6 - "Mortgage Loan Investments - Affiliate." See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XX, L.P. STATEMENTS OF CASH FLOWS Reconciliation of Net Income to Net Cash Provided by Operating Activities
For the Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net income .................................... $ 1,258,637 $ 2,239,792 $ 116,736 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................... 234,259 245,159 341,973 Amortization of deferred borrowing costs .................................... 15,932 14,947 14,011 Amortization of discount on mortgage note payable ............................. 8,487 8,058 7,642 Amortization of deferred revenue ........... (7,175) (6,623) (6,623) Gain on extinguishment of mortgage loan investment .......................... (1,025,833) -- -- Gain on disposition of real estate ......... -- (1,962,280) -- Changes in assets and liabilities: Cash segregated for security deposits .............................. (1,368) 27,545 4,919 Interest and other accounts receivable ............................. 133,422 (65,396) 2,851 Escrow deposits .......................... (17,615) (8,675) (9,133) Prepaid expenses and other assets ................................. (1,300) 834 3,556 Accounts payable and other accrued expenses ....................... (9,146) (35,236) (23,063) Accrued property taxes ................... 5,440 6,093 7,427 Payable to affiliates .................... 173,405 37,982 8,113 Security deposits and deferred rental revenue ......................... (1,792) (14,288) (14,431) ----------- ----------- ----------- Total adjustments ........................ (493,284) (1,751,880) 337,242 ----------- ----------- ----------- Net cash provided by operating activities ................................. $ 765,353 $ 487,912 $ 453,978 =========== =========== ===========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XX, L.P. NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------ McNeil Real Estate Fund XX, L.P. (the "Partnership"), formerly known as Southmark Income Investors, Ltd., was organized on July 19, 1984 as a limited partnership under the provisions of the California Revised Limited Partnership Act to invest in, hold, manage and dispose of mortgage loans, real estate and real estate-related investments. 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 General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. The Partnership has been engaged in the servicing of mortgage loans, including equity and revenue participation loans, and the ownership, operation and management of revenue-producing properties acquired through foreclosure. In July 1990, the Partnership foreclosed on Park Spring Apartments (renamed Sterling Springs Apartments) in settlement of the related mortgage loan. In May 1993, the Partnership foreclosed on 1130 Sacramento Condominiums in settlement of the related mortgage loan. In 1998, the Partnership's mortgage loan investments secured by Idlewood and Lakeland nursing homes and the Partnership's mortgage loan investment - affiliate secured by Fort Meigs Plaza were repaid in full by the respective borrowers. At December 31, 1998, the Partnership operated one revenue-producing property as described in Note 4 - "Real Estate Investment." As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. Basis of Presentation - --------------------- The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership's financial statements consolidate the accounts of Sterling Springs Fund XX Limited Partnership. This single asset tier partnership was formed to accommodate the refinancing of Sterling Springs Apartments. The Partnership is the limited partner and wholly-owns the corporation that is the general partner of the tier partnership. The Partnership retains effective control of the tier partnership. Adoption of Recent Accounting Pronouncements - -------------------------------------------- The Partnership has adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires an enterprise to report financial information about its reportable operating segments, which are defined as components of a business for which separate financial information is evaluated regularly by the chief decision maker in allocating resources and assessing performance. The Partnership does not prepare such information for internal use, since it analyzes the performance of and allocates resources for each property individually. The Partnership's management has determined that it operates one line of business and it would be impracticable to report segment information. Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial statements. Real Estate Investment - ---------------------- The real estate investment is generally stated at the lower of depreciated cost or fair value. The real estate investment is reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value. Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred. Depreciation - ------------ Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 25 years. Mortgage Loan Investments - ------------------------- Mortgage loan investments were recorded at their original basis, net of any allowance for impairment. Interest income was recognized as it was earned. Interest accrual ceased at such time as management determined collection was doubtful. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash on hand and cash on deposit in financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value. Escrow Deposits - --------------- The Partnership is required to maintain escrow accounts in accordance with the terms of its mortgage indebtedness agreement. These escrow accounts are controlled by the mortgagee and are used for payment of property taxes, hazard insurance, capital improvements and/or property replacements. Carrying amounts for escrow deposits approximate fair value. Deferred Borrowing Costs - ------------------------ Loan fees and other related costs incurred to obtain long-term financing on real property are capitalized and amortized using the effective interest method over the term of the related mortgage note payable. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations. Discount on Mortgage Note Payable - --------------------------------- The discount on the mortgage note payable is being amortized over the remaining term of the related mortgage note using the effective interest method. Amortization of the discount on the mortgage note payable is included in interest expense on the Statements of Operations. Rental Revenues - --------------- The Partnership leases its property under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned. Income Taxes - ------------ No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax and the tax effect of its activities accrues to the partners. Allocation of Net Income and Net Loss - ------------------------------------- Under the terms of the Amended Partnership Agreement, net income and net losses (except from a terminating disposition) are allocated 99% to the limited partners and 1% to the General Partner. Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocation of Partnership deductions attributable to debt. The Partnership's tax allocations for 1998, 1997 and 1996 have been made in accordance with these provisions. Distributions - ------------- Under the terms of the Amended Partnership Agreement, operating cash flow and cash from sales or refinancings are distributed 100% to the limited partners as further defined in the Amended Partnership Agreement. Terminating dispositions are to be made in accordance with the partners' positive capital account balances. Distributions may be restricted or suspended in circumstances where the General Partner determines that such action is in the best interest of the Partnership. In 1998, the Partnership distributed $7,232,590 to the limited partners, $5,562,896 of which was cash proceeds from the payoff of the Idlewood Nursing Home mortgage loan investment and the Fort Meigs Plaza mortgage loan investment - - affiliate. The remaining $1,669,694 was cash from operations. The Partnership distributed $3,249,987 to the limited partners in 1997, of which $1,750,000 was cash proceeds from the sale of 1130 Sacramento Condominiums and the remaining $1,499,987 was cash from operations. The Partnership distributed $1,199,950 to the limited partners in 1996 from cash from operations. No distributions were paid to the General Partner in 1998, 1997 or 1996. During the last week of March 1999, the Partnership distributed approximately $1,500,200 to the limited partners of record as of March 1, 1999. Net Income Per Limited Partnership Unit - --------------------------------------- Net income per limited partnership unit ("Unit") is computed by dividing net income allocated to the limited partners by the weighted average number of Units outstanding. Per Unit information has been computed based on 49,512 average Units outstanding during 1998, 1997 and 1996. NOTE 2 - TRANSACTIONS WITH AFFILIATES - ------------------------------------- The Partnership pays property management fees equal to 5% of the gross rental receipts for its properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management services and leasing services. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. Under the terms of its Amended Partnership Agreement, the Partnership pays a disposition fee to an affiliate of the General Partner equaling up to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties, provided, however, that in no event shall all real estate commissions (including the disposition fee) paid to all persons exceed the amount customarily charged in similar arms-length transactions. The fee is due and payable at the time the sale closes. The Partnership incurred $124,500 of such fees during 1997 in connection with the sale of 1130 Sacramento Condominiums. This amount represents 2.65% of the gross sales price. These fees were paid by the Partnership subsequent to December 31, 1998 and are included in payable to affiliates on the Balance Sheets at December 31, 1998 and 1997. Under the terms of the Amended Partnership Agreement, the Partnership is paying an asset management fee 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 percent to the annualized net operating income of each property, or (ii) a value of $10,000 per apartment unit. 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. Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows:
For the Years Ended December 31, ---------------------------------------- 1998 1997 1996 -------- -------- -------- Property management fees ................ $ 61,789 $ 63,072 $ 67,381 Charged to gain on disposition of real estate: Disposition fee ...................... -- 124,500 -- Charged to general and administrative - affiliates: Partnership administration ........... 107,358 111,839 145,203 Asset management fee ................. 111,895 150,919 164,245 -------- -------- -------- $281,042 $450,330 $376,829 ======== ======== ========
Payable to affiliates at December 31, 1998 and 1997 consisted primarily of unpaid property management fees, a disposition fee, Partnership general and administrative expenses and asset management fees and is due and payable from current operations. NOTE 3 - TAXABLE INCOME (LOSS) - ------------------------------ McNeil Real Estate Fund XX, L.P. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly. The Partnership's net assets and liabilities for tax purposes exceeded the net assets and liabilities for financial reporting purposes by $4,657,987 in 1998, $7,573,698 in 1997 and $7,486,117 in 1996. NOTE 4 - REAL ESTATE INVESTMENT - ------------------------------- The basis and accumulated depreciation of the Partnership's real estate investment at December 31, 1998 and 1997 are set forth in the following tables:
Buildings and Accumulated Net Book 1998 Land Improvements Depreciation Value ---- ---------- ------------- ------------- ---------- Sterling Springs Austin, TX $ 392,000 $ 3,981,407 $ (1,525,208) $ 2,848,199 ========= =========== =========== ========== Buildings and Accumulated Net Book 1997 Land Improvements Depreciation Value ---- ---------- ------------- ------------ ---------- Sterling Springs $ 392,000 $ 3,882,558 $ (1,290,949) $ 2,983,609 ========= =========== =========== ==========
On August 1, 1997, the Partnership sold one of four units of 1130 Sacramento Condominiums, located in San Francisco, California, to an unaffiliated purchaser. The remaining three units were sold to the same purchaser on August 28, 1997. The cash purchase price for all four units was $4,700,000. Cash proceeds and the gain on disposition of real estate are detailed below: Gain on Sale Cash Proceeds ------------ ------------- Cash sales price......................... $ 4,700,000 $ 4,700,000 Selling costs............................ (330,666) (206,166) ----------- Net cash proceeds........................ $ 4,493,834 =========== Carrying value........................... (2,407,054) ----------- Gain on disposition of real estate....... $ 1,962,280 =========== As discussed in Note 2 - "Transactions With Affiliates," the Partnership incurred a $124,500 disposition fee payable to an affiliate of the General Partner in connection with the sale of 1130 Sacramento. This fee reduced the amount of the gain on disposition of real estate and is included in selling costs above. However, as the fee was not paid until subsequent to December 31, 1998, it did not reduce the amount of net cash proceeds from the sale. The net cash proceeds from the sale of 1130 Sacramento are $4,369,334 after payment of the disposition fee. NOTE 5 - MORTGAGE LOAN INVESTMENTS - ---------------------------------- The following sets forth the Partnership's mortgage loan investments to unaffiliated borrowers at December 31, 1998 and 1997. The mortgage loan investments were secured by the related real estate.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position Rates % Maturity 1998 1997 - -------- -------- ------- ---------------- -------------- --------------- Idlewood Nursing Home (a) First 8.50 (a) 2/98 $ - $ 1,794,700 Allowance for impairment - (792,013) ------------- ------------- - 1,002,687 ------------- ------------- Lakeland Nursing Home (b) First 12.00 $24,9952/99 - 2,266,025 ------------- ------------- Total $ - $ 3,268,712 ============= =============
(a) The Partnership owned an 83% participation interest in the Idlewood Nursing Home mortgage loan investment. In January 1991, the borrowing partnership became unable to make all payments required under the original mortgage loan agreement. Since that time, the mortgage loan agreement was modified four times such that the maturity date was extended and the interest rate was decreased. The loan modification in effect during 1998 and 1997 required that payments be made on the loan equal to the net cash flow from operations of the property, with a minimum amount due of $9,130 per month. As a result of the borrowing partnership's inability to make the required payments, the Partnership recorded a $792,013 provision for loss in 1992 to reduce the carrying value of the mortgage loan investment to the estimated recoverable amount of the collateral. The Partnership ceased accruing interest on the loan in 1994. The loan was not recorded as an in-substance foreclosure at December 31, 1997. A measure of the impairment of the Idlewood loan was made based on the present value of expected future cash flows required under a February 1995 modification. This measure indicated an impairment less than the total allowance previously recorded. Due to the uncertainties surrounding this mortgage loan investment and its ultimate realizability given its history of numerous modifications, none of the previously recorded allowance was reversed until the underlying property was sold. All payments received on the loan in 1998 and 1997 were recorded as a reduction of principal. The mortgage loan investment matured in February 1998. The Partnership and the borrower entered into an agreement whereby the borrower paid the Partnership $2.4 million in settlement of both principal and interest due on the mortgage note in May 1998. Since the Partnership owned an 83% participation interest in the note, $408,000 of the $2.4 million settlement was paid to the owner of the remaining 17% of the note. As a result of this transaction, the Partnership recognized a gain on extinguishment of mortgage loan investment as follows: Net proceeds from payoff of mortgage loan investment..... $1,992,000 Net book value of mortgage loan investment............... (966,167) --------- Gain on extinguishment of mortgage loan investment....... $1,025,833 ========= (b) On August 20, 1998, the Partnership received $2,541,572 as payment in full for both principal and interest receivable on the mortgage loan investment secured by Lakeland Nursing Home. Since the Partnership owned a 90% participation interest in the note, $254,157 of the payoff was paid to the owner of the remaining 10% of the note. Of the $2,287,415 net proceeds received, $2,249,181 was applied to the principal balance of the loan and the remaining $38,234 was applied to accrued interest receivable. A summary of activity for mortgage loan investments for each of the three years in the period ended December 31, 1998 is as follows:
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Balance at beginning of year........ $ 3,268,712 $ 3,404,553 $ 3,537,436 Collection of principal ............ (53,364) (135,841) (132,883) Proceeds from payoff ............... (4,241,181) -- -- Gain recognized .................... 1,025,833 -- -- ----------- ----------- ----------- Balance at end of year ............. $ -- $ 3,268,712 $ 3,404,553 =========== =========== ===========
NOTE 6 - MORTGAGE LOAN INVESTMENTS - AFFILIATE - ----------------------------------------------- The following sets forth the Partnership's mortgage loan investments to an affiliated borrower at December 31, 1998 and 1997:
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity 1998 1997 - -------- ------------ ----------- ---------------- -------------- -------- Fort Meigs Plaza Shopping Center First 12.81 $ 33,333 3/98 $ -- $ 2,996,176 ------------- ----------- Second 8.25 (b) $4,074 (b) 9/97 -- 733,900 Allowance -- (130,000) ------------- ----------- -- 603,900 ------------- ----------- Total $ -- $ 3,600,076 ============= ===========
(a) The mortgage loans were non-recourse to the borrower. (b) Although interest on the loan accrued at 8.25%, interest only payments equal to an effective interest rate of 6.66% were payable monthly. All accrued interest was due at maturity. On August 24, 1992, pursuant to a lawsuit settlement, a mortgage loan investment, which was secured by a property owned by an affiliate of the General Partner, McNeil Real Estate Fund XXI, L.P. ("Fund XXI"), was transferred to the Partnership. In June 1993, a new loan agreement was executed; and Fund XXI substituted a second lien on another of its properties, Fort Meigs Plaza Shopping Center, as the collateral on the loan. The first lien mortgage note secured by Fort Meigs Plaza, which was owned by an unaffiliated lender, matured in December 1997. In order to prevent foreclosure of the property by the first lienholder and to protect its second lien interest in the property, the Partnership purchased the first lien in December 1997 for $2,996,176 and extended the maturity of the loan to March 1998. Related to the initial transfer, the Partnership recorded a deferred gain for the portion of the non-cash assets received as compared to total assets received pursuant to the lawsuit settlement. This deferred gain was being amortized as principal payments were received on the mortgage loan investment. The Partnership reduced the deferred gain by $130,000 in 1997, representing the estimated uncollectible amount of the mortgage loan investment, as discussed below. The deferred gain totaled $20,054 at December 31, 1997. On April 20, 1998, Fort Meigs Plaza was sold to a non-affiliate for a gross sales price of $3.8 million. The Partnership received $3,615,353 as payment in full for both principal and interest receivable on the loans, which represents the available cash proceeds from the sale of the property. The cash proceeds from the sale were not sufficient to allow the Partnership to collect the entire balance of the mortgage loan investments or to recognize the entire balance of deferred revenue. The Partnership ceased accruing interest on the loans in 1998 when it became apparent that the entire balance of the loans was not collectible. The Partnership recognized interest income on mortgage loan investments - affiliate of $108,214 in 1998. An additional $27,465 of uncollectible interest was not recognized by the Partnership in 1998. A summary of activity for mortgage loan investments - affiliate for each of the three years in the period ended December 31, 1998 is as follows:
For the Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ----------- ------------ ----------- Balance at beginning of year........ $ 3,600,076 $ 733,900 $ 733,900 Purchase of first lien ............. -- 2,996,176 -- Collection of principal ............ (9,126) -- -- Proceeds from payoff ............... (3,570,896) -- -- Deferred gain ...................... (20,054) (130,000) -- ----------- ----------- ----------- Balance at end of year ............. $ -- $ 3,600,076 $ 733,900 =========== =========== ===========
NOTE 7 - MORTGAGE NOTE PAYABLE - ------------------------------ The following sets forth the mortgage note payable of the Partnership at December 31, 1998 and 1997. The mortgage note payable is secured by the related real estate investment.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rate % Maturity 1998 1997 - -------- ------------ ------- ---------------- -------------- ------------- Sterling Springs Apartments (c) First 8.15 $23,443 7/03 $ 2,657,171 $ 2,719,160 Discount (b) (43,859) (52,346) ------------- ----------- $ 2,613,312 $ 2,666,814 ============= ===========
(a) The debt is non-recourse to the Partnership. (b) The mortgage loan was discounted to an effective rate of 8.62%. (c) Financing was obtained in June 1993 under the terms of a Real Estate Mortgage Investment Conduit financing. Principal prepayments made before July 2000 are subject to a Yield Maintenance premium, as defined. Scheduled principal maturities of the mortgage note payable under existing terms, excluding a discount of $43,859, are as follows: 1999 $ 67,234 2000 72,923 2001 79,093 2002 85,786 2003 2,352,135 ------------ Total $ 2,657,171 ============ Based on borrowing rates currently available to the Partnership for a mortgage loan with similar terms and average maturities, the fair value of the mortgage note payable was approximately $2,661,000 at December 31, 1998 and $2,768,000 at December 31, 1997. NOTE 8 - LEGAL PROCEEDINGS - -------------------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: 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. 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. 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. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. 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. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. 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. NOTE 9 - COMMITMENTS AND CONTINGENCIES - -------------------------------------- Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described in Note 1 - "Organization and Summary of Significant Accounting Policies", Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. McNEIL REAL ESTATE FUND XX, L.P. SCHEDULE III REAL ESTATE INVESTMENT AND ACCUMULATED DEPRECIATION December 31, 1998
Costs Initial Cost Cumulative Capitalized Related Buildings and Write-down for Subsequent Description Encumbrances Land Improvements Impairment To Acquisition Sterling Springs Apartments Austin, TX $2,613,312 $ 392,000 $ 2,908,000 $ - $ 1,073,407 ========= ========== ============= ============= =============
See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XX, L.P. SCHEDULE III REAL ESTATE INVESTMENT AND ACCUMULATED DEPRECIATION December 31, 1998
Gross Amount at Which Carried at Close of Period Accumulated Buildings and Depreciation Description Land Improvements Total (a) and Amortization - ------------ ----- ------------- --------- ---------------- Sterling Springs Apartments Austin, TX $ 392,000 $ 3,981,407 $ 4,373,407 $ (1,525,208) =========== =========== ============ ============
(a) For Federal income tax purposes, the property is depreciated over lives ranging from 7 to 27.5 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $4,330,914 and accumulated depreciation was $893,134 at December 31, 1998. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XX, L.P. SCHEDULE III REAL ESTATE INVESTMENT AND ACCUMULATED DEPRECIATION December 31, 1998
Date of Date Depreciable Description Construction Acquired Lives (Years) - ----------- ------------ -------- ------------- Sterling Springs Apartments Austin, TX 1985 7/90 5-25
See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XX, L.P. Notes to Schedule III Real Estate Investment and Accumulated Depreciation A summary of activity for the Partnership's real estate investments and accumulated depreciation is as follows:
For the Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ----------- ------------ ------------ Real estate investments: Balance at beginning of year ............ $ 4,274,558 $ 6,892,667 $ 6,819,484 Disposition of real estate .............. -- (2,796,344) -- Improvements ............................ 98,849 178,235 73,183 ----------- ----------- ----------- Balance at end of year .................. $ 4,373,407 $ 4,274,558 $ 6,892,667 =========== =========== =========== Accumulated depreciation: Balance at beginning of year ............ $ 1,290,949 $ 1,435,080 $ 1,093,107 Disposition of real estate .............. -- (389,290) -- Depreciation ............................ 234,259 245,159 341,973 ----------- ----------- ----------- Balance at end of year .................. $ 1,525,208 $ 1,290,949 $ 1,435,080 =========== =========== ===========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURES. ---------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- --------------------------------------------------- Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows: Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Robert A. McNeil, 78 Mr. McNeil is also Chairman of the Chairman of the Board and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such an entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the International Board of Directors of the Salk Institute, which promotes research in improvements in health care. Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband Co-Chairman of the Robert A. McNeil, of McNeil Investors, Board Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute. Ron K. Taylor 41 Mr. Taylor is the President and Chief President and Chief Executive Officer of McNeil Real Estate Executive Officer Management which is an affiliate of the General Partner. Mr. Taylor has been in this capacity since the resignation of Donald K. Reed on March 4, 1997. Prior to assuming his current responsibilities, Mr. Taylor served as a Senior Vice President of McREMI. Mr. Taylor has been in this capacity since McREMI commenced operations in 1991. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management firm. In this capacity, Mr. Taylor had the responsibility for the management and leasing of a 21,000,000 square foot portfolio of commercial properties. Mr. Taylor has been actively involved in the real estate industry since 1983. Each director shall serve until his successor shall have been duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1998, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1998. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, was known by the Partnership to own more than 5% of the Units, other than High River Limited Partnership which owns 6,486 Units (13.1% of the outstanding Units) and MacKenzie Patterson, Inc. which owns 2,984 Units (6.03% of the outstanding Units) at February 1, 1999. The business address for High River Limited Partnership is 100 South Bedford Road, Mount Kisco, New York 10549. The business address for MacKenzie Patterson, Inc. is 1640 School Street, #100, Moraga, California 94556. (B) Security ownership of management. Affiliates of the General Partner and the officers and directors of its general partner collectively own 4.5 Units, which is less than 1% of Units outstanding at February 1, 1999. (C) Change in control. None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of general partner compensation other than property management fees and reimbursements of certain costs. 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 percent to the annualized net operating income of each property, or (ii) a value of $10,000 per apartment unit. 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. For the year ended December 31, 1998, the Partnership paid or accrued $111,895 of such asset management fees. The Partnership pays property management fees equal to 5% of the gross rental receipts of its properties to McREMI, an affiliate of the General Partner, for providing property management services. Additionally, the Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1998, the Partnership paid or accrued $169,147 of such property management fees and reimbursements. See Item 1 - Business, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Note 2 - "Transactions With Affiliates." Under the terms of its Amended Partnership Agreement, the Partnership pays a disposition fee to an affiliate of the General Partner equaling up to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties, provided, however, that in no event shall all real estate commissions (including the disposition fee) paid to all persons exceed the amount customarily charged in similar arms-length transactions. The fee is due and payable at the time the sale closes. The Partnership incurred $124,500 of such fees during 1997 in connection with the sale of 1130 Sacramento Condominiums. This amount represents 2.65% of the gross sales price. These fees were paid by the Partnership subsequent to December 31, 1998 and are included in payable to affiliates on the Balance Sheets at December 31, 1998 and 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------- ---------------------------------------------------------------- See accompanying Index to Financial Statements at Item 8 - Financial Statements and Supplementary Data. (A) Exhibits Exhibit Number Description ------- ----------- 4. Amended and Restated Limited Partnership Agreement dated March 30, 1992 (incorporated by reference to the Current Report of the registrant on Form 8-K dated March 30, 1992, as filed on April 10, 1992). 10.10 Loan Agreement dated June 23, 1993, between Lexington Mortgage Company and McNeil Real Estate Fund XX, L.P., et al. (1) 10.11 Property Management Agreement dated June 24, 1993, between McNeil Real Estate Management, Inc. and Sterling Springs Fund XX Limited Partnership (filed without schedules). (2) 10.14 Property Management Agreement dated March 30, 1992, between McNeil Real Estate Fund XX, L.P. and McNeil Real Estate Management, Inc. (3) 10.15 Amendment of Property Management Agreement dated March 5, 1993, by McNeil Real Estate Fund XX, L.P. and McNeil Real Estate Management, Inc. (3) 11. Statement regarding computation of net income per limited partnership unit (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies"). 22. Following is a list of subsidiaries of the Partnership: Names Under Jurisdiction Which It Is Name of Subsidiary Incorporation Doing Business ------------------ -------------- -------------- Sterling Springs Fund XX Limited Partnership Delaware None (1) Incorporated by reference to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783) on Form 10-K for the period ended December 31, 1993, as filed on March 30, 1994. (2) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1993, as filed on March 30, 1994. (3) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1992, as filed on March 30, 1993. (B) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 1998. McNEIL REAL ESTATE FUND XX, L.P. A Limited Partnership SIGNATURE PAGE Pursuant to the requirements of Section 13 or 15(d) 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 XX, L.P. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 31, 1999 By: /s/ Robert A. McNeil - -------------- ---------------------------------------------- Date Robert A. McNeil Chairman of the Board and Director Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 31, 1999 By: /s/ Ron K. Taylor - -------------- ---------------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 31, 1999 By: /s/ Carol A. Fahs - -------------- ---------------------------------------------- Date Carol A. Fahs Vice President of McNeil Investors, Inc. (Principal Accounting Officer) EX-27 2
5 12-MOS DEC-31-1998 DEC-31-1998 3,070,785 0 6,603 0 0 0 4,373,407 (1,525,208) 6,225,467 0 2,613,312 0 0 0 3,012,266 6,225,467 1,290,193 2,832,174 625,948 860,207 470,002 0 243,328 1,258,637 0 1,258,637 0 0 0 1,258,637 0 0
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