<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee required]
For the fiscal year ended December 31, 1998
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee required]
For the Transition period from __________ to __________
Commission File Number 33-25984
NET 2 L.P.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3497738
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Lexington Corporate Properties Trust
355 Lexington Avenue
New York, NY 10017
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 692-7200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Limited
Partnership Interests
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 (or for such shorter period that the Registrant was
required to file such reports), 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|
State the aggregate market value of the voting stock held by non-affiliates of
the registrant.
There is no active public market for the units of limited partnership interests
issued by the Registrant.
Not Applicable.
Page 1 of 31
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
None.
2
<PAGE> 3
PART I.
Forward Looking Statements
- --------------------------
When used in this Form 10-K Report, the words "believes", "expects", "estimates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially. In particular, among the factors that could
cause actual results to differ materially are continued qualification as a real
estate partnership, general business and economic conditions, competition,
increases in real estate construction costs, interest rates, accessibility of
debt and equity capital markets and other risks inherent in the real estate
business including tenant defaults, potential liability relating to
environmental matters and illiquidity of real estate investments. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Partnership undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
- -----------------
Net 2 L.P. (the "Partnership"), is a limited partnership formed on November 9,
1988 under the Uniform Limited Partnership Act of the State of Delaware for the
purpose of investing primarily in existing commercial properties triple net
leased to corporations or other entities. The Partnership Agreement was restated
and amended on June 13, 1994, which enables the Partnership to make additional
real estate investments.
The General Partner of the Partnership is Lepercq Net 2 L.P., a Delaware limited
partnership (the "General Partner"). Lepercq Net 2 Inc. is the general partner
of the General Partner. The directors and executive officers of Lepercq Net 2
Inc. are discussed in PART III, Item 10 (Directors and Executive Officers of the
Registrant). Leased Properties Management, Inc., an affiliate of Lepercq Net 2
Inc., performs certain property management services in connection with the
operation of the Partnership's business.
The Partnership commenced an offering to the public of 500,000 units at $100 per
unit of limited partnership interests (the "Units") on January 10, 1989 pursuant
to a Prospectus. On July 19, 1990, the Partnership held the final admission of
Limited Partners, and the offering was terminated after a total of 477,417 units
had been sold, equaling $47.742 million in capital contributions. The
Partnership returned a capital contribution of $25,000 (250 Units) to a limited
partner admitted in December 1989. No additional Units have been returned nor
repurchased since 1990.
The Partnership invests in net leased real properties (or interests therein)
located throughout the United States, which offer the potential for (i)
preservation and protection of the capital of the limited partners of the
Partnership, (ii) providing increasing cash available distributions, (iii)
providing tax benefits so that a portion of the cash distributions is sheltered
from current income taxation, and (iv) appreciation in value of the
Partnership's investments.
3
<PAGE> 4
Investments are made in various types of commercial real properties and
interests therein. Such investments may include, but are not limited to: fitness
centers, warehouses, distribution centers, office buildings, retail stores,
hotels, motels, nursing homes and congregate care facilities. Investments are
not restricted as to specific geographical areas, however, all of the
Partnership's investments are made within the United States.
The Partnership attempts to negotiate provisions in its leases which will
provide that all the risks of such matters as fitness for use or purpose, design
or condition, quality of material or workmanship, latent or patent defects, the
Partnership's title, value, compliance with specifications, location, use,
merchantability, quality, description, durability or operation are borne by the
lessees. However, competitive conditions may require that the Partnership accept
certain risks, in which case it will attempt to arrange adequate insurance, if
available at a reasonable cost.
Each of the following properties (as hereinafter defined) accounted for 10% or
more of consolidated rental revenues for the years ended December 31,:
<TABLE>
<CAPTION>
Property 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
Tranzonic (a) 12% 14% 15%
Total Petroleum (b) 12% 14% 16%
Westland 12% - -
NCS (c) 10% 11% 13%
Art Institute of Seattle - 19% 20%
</TABLE>
(a) These properties consist of two office/warehouse facilities
in Ohio and Arizona.
(b) These properties consist of thirteen retail stores at various
locations in Michigan.
(c) These properties consist of fourteen retail stores at various
locations in Texas.
The Partnership attempts to maintain a working capital cash reserve in an amount
equal to 1.5% of the gross proceeds of the offering, which is anticipated to be
sufficient to satisfy liquidity requirements. Liquidity could be adversely
affected by unanticipated costs, particularly costs relating to the vacancy of
properties, tenants experiencing financial difficulties, and greater than
anticipated operating expenses. To the extent that such working capital reserves
are insufficient to satisfy the cash requirements of the Partnership, additional
funds may be obtained through short-term or permanent loans or by reducing
distributions to limited partners.
The Partnership operates in one industry segment, investment in net leased real
property.
The General Partner has granted Lexington Corporate Properties Trust (the
"Company"), whose chairman and Co-Chief Executive Officer is chairman of the
General Partner, an option exercisable at any time, to acquire the general
partnership interest. The Company provided the Partnership various
administrative services. Under the terms of the option, the Company, subject to
review of any such transactions by the independent members of its Board of
Trustees, may acquire the general partnership interest at its fair market value
based upon a formula relating to partnership cash flows, with the Company
retaining the option of paying such fair market value in securities of the
Company, limited partnership units in controlled subsidiaries, cash or a
combination thereof.
4
<PAGE> 5
Competition
- -----------
The real estate business is highly competitive and the Partnership competes with
numerous established companies having significantly greater resources and
experience. Competition may also come from other partnerships that have been or
may be formed by the General Partner or its affiliates.
Environmental Matters
- ---------------------
Under various federal, state and local environmental laws, statutes, ordinances,
rules and regulations, an owner of real property may be liable for the costs of
removal or redemption of certain hazardous or toxic substances at, on, in or
under such property as well as certain other potential costs relating to
hazardous or toxic substances (including government fines and penalties and
damages for injuries to persons and adjacent property). Such laws often impose
liability without regard to whether the owner knew of, or was responsible for,
the presence or disposal of such substances. Although the Partnership's tenants
are responsible for any environmental damage and claims related to the leased
premises, in the event of the bankruptcy or inability of the tenant of such
premises to satisfy any obligations with respect thereto, the Partnership may be
required to satisfy such obligations. In addition, under certain environmental
laws, the Partnership, as the owner of such properties, may be held directly
liable for any such damages or claims irrespective of the provisions of any
lease.
From time to time, in connection with the conduct of the Partnership's business,
and prior to the acquisition of any property from a third party or as required
by the Partnership's financing sources, the Partnership authorizes the
preparation of Phase I environmental reports with respect to its properties.
Based upon such environmental reports and management's ongoing review of its
properties, as of the date of this report, management was not aware of any
environmental condition with respect to any of the Partnership's properties
which management believed would be reasonably likely to have a material adverse
effect on the Partnership. The Partnership does incur costs relating to
environmental investigation and re-mediation related to the Total Petroleum
properties. If the cost exceeds $10,000 for any one property, the Partnership
applies for reimbursements in excess of $10,000 to the Michigan Underground
Storage Tank Financial Assurance Fund ("MUSTFA"). All claims are subject to
approval by MUSTFA. These costs are not expected to have a material impact on
the financial position or results of operations of the Partnership. The
Partnership has received partial reimbursement of such costs. There can be no
assurance, however, that (i) the discovery of environmental conditions, the
existence or severity of which were previously unknown, (ii) changes in law,
(iii) the conduct of tenants or (iv) activities relating to properties in the
vicinity of the Partnership's Properties will not expose the Partnership to
material liability in the future. Changes in laws increasing the potential
liability for environmental conditions existing on properties or increasing the
restrictions on discharges or other conditions may result in significant
unanticipated expenditures or may otherwise adversely affect the operations of
the Partnership's tenants, which would adversely affect the Partnership's funds
from operations.
Employees
- ---------
The Partnership has no employees. All necessary personnel are provided by the
General Partner or its affiliates or agents. See Part III Item 10, "Directors
and Executive Officers of the Registrant" and Item 13, "Certain Relationships
and Related Transactions."
5
<PAGE> 6
ITEM 2. PROPERTIES
- -------------------
Following is a detailed schedule of the Partnership's real estate, including
properties held for sale, and lease terms at December 31, 1998:
<TABLE>
<CAPTION>
Annualized
Base Rent Net
Acquisition at Lease(s) Rentable
Date of Cost 12/31/98 Expiration Square
Acquisition Tenant Location ($000's) ($000's) (month/year) Feet
- ----------- ------------------------ -------------------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
02-28-89 Tranzonic Cos. Highland Heights, OH $ 5,822 $ 677 03/09 94,657
02-28-89 Tranzonic Cos. Tempe, AZ 1,548 180 03/09 49,951
1989 Total Petroleum, Inc. Various (12) 8,474 725 05/11 77,846
03-05-90 Everest & Jennings Earth City, MO 4,377 323 08/02 147,000
06-19-90 Diamond Shamrock Corp. El Paso, TX (*) 474 61 06/10 3,200
06-19-90 National Convenience
Stores, Inc. Various (13) (*) 4,367 507 12/12 33,830
09-14-90 Ameritech Services, Inc. Columbus, OH 2,450 245 08/05 20,000
09-28-90 RCS of Tucson Tucson, AZ 1,681 314 09/10 28,591
06-22-94 Kohl's Dept. Stores Eau Claire, WI 4,187 435 01/15 76,164
12-23-94 A-Copy, Inc. Milford, CT 2,949 315 12/04 27,360
09-21-95 Duracraft Corp. Southborough, MA 4,166 412 09/15 57,698
06-05-97 Wal-Mart Stores, Inc. Westland, MI 7,904 753 01/09 102,826
07-24-98 Best Buy Inc. Canton, OH 5,301 465 02/18 46,371
07-24-98 Best Buy Inc. Spartanburg, SC 4,518 395 02/18 45,800
09-29-98 Hollywood Video Stores
Inc. Wilsonville, OR 14,009 1,345 11/08 122,853
------- ------ -------
Total $72,227 $7,152 934,147
======= ====== =======
</TABLE>
(*) As of December 31, 1998, thirteen of the fourteen properties are held for
sale.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Neither the Partnership nor its properties are subject to any pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1998 to a vote of Unit holders.
6
<PAGE> 7
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
- -------
An established public trading market for the Units does not exist, and it is not
anticipated that such a market will develop in the near future. Further, the
transfer of Units is subject to substantial restrictions. Accordingly,
information as to the market value of a Unit at any given date is not available.
As of December 31, 1998, there were 2,049 investors holding 477,167 limited
partnership units.
The Partnership makes quarterly cash distributions. Cash distributions paid per
Unit of limited partnership interest for each of the years in the three-year
period ended December 31, 1998 was $5.00.
7
<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following sets forth a summary of selected financial data for the
Partnership for the years ended December 31, (in thousands, except per unit
data):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rental revenue $ 6,871 $ 5,934 $ 5,442 $ 5,146 $ 4,269
======== ======== ======== ======== ========
Income before extraordinary item $ 6,992 $ 2,364 $ 2,308 $ 2,278 $ 1,895
======== ======== ======== ======== ========
Income before extraordinary item
per Unit of limited
partnership interest (*) $12.62 to $ 4.20 to $ 4.02 to $ 3.87 to $ 3.10 to
15.55 5.30 5.23 5.23 4.43
======== ======== ======== ======== ========
Extraordinary item $ -- $ -- $ -- $ -- $ 1,913
======== ======== ======== ======== ========
Extraordinary item per Unit of
limited partnership interest (*) $ -- $ -- $ -- $ -- $ 3.13 to
-- -- -- -- 4.48
======== ======== ======== ======== ========
Net income $ 6,992 $ 2,364 $ 2,308 $ 2,278 $ 3,808
======== ======== ======== ======== ========
Net income per Unit of
limited partnership interests (*) $12.62 to $ 4.20 to $ 4.02 to $ 3.87 to $ 6.23 to
15.55 5.30 5.23 5.23 8.91
======== ======== ======== ======== ========
Total assets $ 78,918 $ 55,001 $ 50,002 $ 47,658 $ 48,234
======== ======== ======== ======== ========
Mortgage notes payable $ 41,519 $ 22,106 $ 17,181 $ 14,721 $ 14,994
======== ======== ======== ======== ========
Cash distributions per Unit of
limited partnership interests $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00
======== ======== ======== ======== ========
</TABLE>
(*) Amounts allocated to and received by unit holders vary depending on the
dates they became unit holders.
The above financial data should be read in conjunction with the Financial
Statements and the related notes appearing elsewhere in this report.
8
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Liquidity and Capital Resources
- -------------------------------
On January 10, 1989, the Partnership commenced the sale of up to 500,000 Units
of limited partnership interests at $100 per Unit with the option to offer an
additional 500,000 Units. As of July 19, 1990, the Partnership had raised a
total of $47.742 million in capital contributions (477,417 Units) and the
offering was terminated. The net offering proceeds consisting of aggregate gross
offering proceeds of $47.742 million less related offering costs of $5.691
million along with the proceeds from a closing loan, bridge financing and
mortgage debt, have been utilized by the Partnership to invest in triple net
leased real estate properties (or interests therein); to pay for related
property acquisition expenses, financing and acquisition fees; and to provide
for a working capital reserve. The Partnership returned a capital contribution
of $25,000 (250 Units) to a limited partner admitted in December 1989. No
additional Units have been returned nor repurchased since 1990.
Pursuant to the Partnership Agreement, limited partnership Units may be
repurchased at 90% of the net asset value 60 days after the offer to repurchase
has been made.
On June 6, 1997, the Partnership acquired a property in Westland, Michigan. The
Westland Property consists of a 102,826 square foot retail department store
building leased to Wal-Mart Stores, Inc. pursuant to a triple net lease. The
lease has a remaining term which expires on January 31, 2009. The purchase
price of $7.050 million and related expenses of $81,000 were satisfied by a
cash payment and by an assumption of an existing note with a principal balance
of $4.712 million. The note bears interest at a stated rate of 10.5% per annum
and the maturity date of the note is September 1, 2009. The purchase of the
Westland Property has been recorded in the financial statements at the total of
the cash paid plus the fair value of the mortgage liability assumed. The fair
value of the mortgage was determined, using an imputed interest rate of 7.5%,
to be $5.484 million.
During the year ended December 31, 1998, the Partnership acquired the following
properties:
<TABLE>
<CAPTION>
Annualized
Base Rent Net
Acquisition at Lease(s) Rentable
Date of Cost 12/31/98 Expiration Square
Acquisition Tenant Location ($000's) ($000's) (month/year) Feet
- ----------- ------------------------ -------------------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
July 24 Best Buy Canton, OH $5,301 $ 465 2/18 46,371
July 24 Best Buy Spartanburg, SC 4,518 395 2/18 45,800
September 29 Hollywood Videos Wilsonville, OR 14,009 1,345 11/08 122,853
</TABLE>
During the year, the Partnership sold the Sandusky and Seattle Properties for a
net proceeds of $11.8 million and recognized a net gain of approximately $4.5
million.
On October 16, 1998, the Partnership entered into an agreement to acquire a
property located in Ocala, Florida for approximately $19.5 million. The property
consist of 696,597 square foot warehouse and distribution building, net leased
to Associated Grocers of Florida, Inc. through December 31, 2018. The
Partnership obtained financing on January 5, 1999. The acquisition closed on
January 7, 1999.
9
<PAGE> 10
On October 29, 1998, the Partnership received an increase and an extension on
the line of credit of up to $24.5 million from Nations Credit Commercial
Corporation bearing interest at a rate of 315 basis points over LIBOR. As of
December 31, 1998, the outstanding balance on the line of credit was $24.44
million with an interest rate of 8.77%. The line of credit matures on May 1,
2000.
On November 5, 1998, the Partnership entered into an agreement to sell thirteen
of the fourteen NCS Properties for approximately $5.425 million. As of December
31, 1998, the book value of the properties was approximately $4.65 million,
including rent receivable of approximately $526,000. The sale closed on January
25, 1999.
As of December 31, 1998, the Partnership repaid $1.7 million of its short-term
debt.
As of December 31, 1998, the restricted cash represents proceeds from the sale
of a property restricted for investment in future acquisitions.
The unpaid cumulative preferred return at December 31, 1998 totaled $24.194
million ($49.46 to $51.40 per Unit, per close), and was reduced by $596,459
($1.25 per Unit) with the fourth quarter 1998 distribution paid on January 29,
1999.
Except for the debt service requirements under the mortgages, there are no
material restrictions upon the Partnership's present or future ability to make
distributions in accordance with the provisions of its Partnership Agreement.
Impact of Year 2000
- -------------------
The Year 2000 compliance issue concerns the inability of computer systems to
accurately calculate, store or use a date after 1999. This could result in a
system failure or miscalculations causing disruptions of operations. The Year
2000 issue affects virtually all companies and organizations.
The General Partner has been taking the necessary steps to understand the nature
and extent of the work required to make its core information computer systems
and non-information embedded systems Year 2000 compliant. The General Partner
has determined that it will not be necessary to significantly modify, update or
replace its computer hardware and software applications.
The vendor that provides the General Partner's existing general ledger software
has released a compliant version of its product which the General Partner is
currently using. The cost of the general ledger system did not have a material
effect on the Partnership's financial condition or results of operations. The
Partnership's properties, which have no scheduled lease expirations prior to
August 18, 2002, are subject to net leases and accordingly the Year 2000
compliance of embedded systems (e.g., security, HVAC, fire and elevator systems)
are the responsibility of the tenants. The General Partner has contacted each of
its tenants asking them to identify and evaluate the changes and modifications
necessary to make these systems compliant for Year 2000 processing. The cost
associated with the effect to make the embedded systems Year 2000 compliant are
the tenant's responsibility. However, no assurances can be given that the
properties embedded systems will be Year 2000 compliant by December 31, 1999 and
compliance costs, if any, incurred by the Partnership would not be significant.
The General Partner is communicating with significant third-party service
providers and vendors with which it does business to determine the efforts being
made on their part for compliance. The General Partner is attempting to receive
compliance certificates from all third parties that have a material impact on
the Partnership's operations, but no assurance can be given with respect to the
cost or timing of such efforts or the potential effects of any failure to
comply.
10
<PAGE> 11
Management will closely monitor the Partnership's entire Year 2000 compliance
function and will develop contingent plans no later than the third quarter of
1999 if necessary.
Results of Operations ($000)
- ----------------------------
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1998 1997 1996 1998-1997 1997-1996
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues $6,963 6,083 5,913 880 170
------ ----- ----- ----- ----
Total expenses
Interest 2,277 1,875 1,568 402 307
Depreciation 1,238 1,074 994 164 80
Amortization 154 136 143 18 (7)
General and administrative 818 634 900 184 (266)
------ ----- ----- ----- ----
4,487 3,719 3,605 768 114
------ ----- ----- ----- ----
Income before gain on sale
of property, net 2,476 2,364 2,308 112 56
Gain on sale of property 4,516 -- -- 4,516 --
------ ----- ----- ----- ----
Net income $6,992 2,364 2,308 4,628 56
====== ===== ===== ===== ====
</TABLE>
The changes in results of operations with respect to revenues, interest and
depreciation for the years ended December 31, 1998, 1997 and 1996 are primarily
attributed to the operations of the real property investments acquired and
related mortgage debt assumed in 1997 and 1998 as described above. Included in
total revenues are interest and other revenues, which had decreased $57,000 and
$322,000 in 1998 and 1997, respectively. The decreases resulted from lower cash
balances maintained, decreases in MUSTFA reimbursements received and gain
recognized from sale of the NCS stocks in 1996.
General and administrative expenses increased in 1998 and decreased in 1997 due
to transactional expenses incurred in relation to the partnership roll-up.
The gain on sale of properties resulted from the sale of the Seattle Property
of $4.527,000, net of $11,000 loss incurred from the sale of the Sandusky
Property.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
The Partnership's exposure to market risk relates to its variable rate credit
facility. As of December 31, 1998, the Partnership's variable rate indebtedness
represented 59% of total long-term indebtedness. During 1998, this variable rate
indebtedness had a weighted average interest rate of 9.87%. Had the weighted
average interest rate been 100 basis points higher, the Partnership's net income
would have been approximately $135,000 less.
11
<PAGE> 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
NET 2 L.P.
INDEX
Page
----
Independent Auditors' Report 13
Balance Sheets at December 31, 1998 and 1997 14
Statements of Income for the years ended December 31, 1998,
1997 and 1996 15
Statements of Changes in Partners' Capital (Deficit) for the years
ended December 31, 1998, 1997 and 1996 16
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996 17
Notes to Financial Statements 18-24
Financial Statement Schedule
- ----------------------------
Real Estate and Accumulated Depreciation Schedule III 25
12
<PAGE> 13
Independent Auditors' Report
----------------------------
The Partners
Net 2 L.P.:
We have audited the financial statements of Net 2 L.P. as listed in the
accompanying index. In connection with our audits of the financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These financial statements and the financial statement
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement 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 Net 2 L.P. as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
New York, New York
February 24, 1999
13
<PAGE> 14
NET 2 L.P.
BALANCE SHEETS
(In thousands, except units and per unit amounts)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Real estate, at cost:
Buildings $ 55,963 $ 45,530
Land 11,713 11,352
-------- --------
67,676 56,882
Less: accumulated depreciation 6,164 7,160
-------- --------
61,512 49,722
Properties held for sale 4,650 526
Cash and cash equivalents 518 2,181
Restricted cash 9,861 --
Deferred expenses, net of accumulated amortization
of $634 and $480 in 1998 and 1997, respectively 429 377
Rent receivable 1,667 2,054
Other assets 281 141
-------- --------
$ 78,918 $ 55,001
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgage notes payable $ 41,519 $ 22,106
Accrued interest payable 216 135
Accounts payable and accrued liabilities 179 313
-------- --------
41,914 22,554
-------- --------
Commitments and contingencies (note 5)
Partners' capital (deficit):
General Partner (274) (365)
Limited Partners ($100 per Unit, 500,000 Units
authorized, 477,167 Units issued and outstanding) 37,278 32,812
-------- --------
Total partners' capital 37,004 32,447
-------- --------
$ 78,918 $ 55,001
======== ========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 15
NET 2 L.P.
STATEMENTS OF INCOME
(In thousands, except per unit amounts)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Rental $6,871 $5,934 $5,442
Interest and other 92 149 471
----- ----- -----
6,963 6,083 5,913
----- ----- -----
Expenses:
Interest 2,277 1,875 1,568
Depreciation 1,238 1,074 994
Amortization of deferred expenses 154 136 143
General and administrative 818 634 900
----- ----- -----
4,487 3,719 3,605
----- ----- -----
Income before gain from
sale of properties, net 2,476 2,364 2,308
Gain from sale of properties, net 4,516 -- --
----- ----- -----
Net income $6,992 $2,364 $2,308
===== ===== =====
Net income per Unit of limited
partnership interest (*) $12.62 to $15.55 $4.20 to $5.30 $4.02 to $5.23
================ ============== ==============
</TABLE>
(*) Amounts allocated to unit holders vary depending on the dates they become
unit holders.
See accompanying notes to financial statements.
15
<PAGE> 16
NET 2 L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(In thousands)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Limited
Total Partner Partners
-------- ------- -------
<S> <C> <C> <C>
Partners' capital (deficit)
at December 31, 1995 $ 32,645 $ (360) $33,005
Net income 2,308 46 2,262
Cash distributions (2,435) (49) (2,386)
-------- ------- -------
Partners' capital (deficit)
at December 31, 1996 32,518 (363) 32,881
Net income 2,364 47 2,317
Cash distributions (2,435) (49) (2,386)
-------- ------- -------
Partners' capital (deficit)
at December 31, 1997 32,447 (365) 32,812
Net income 6,992 140 6,852
Cash distributions (2,435) (49) (2,386)
-------- ------- -------
Partners' capital (deficit)
at December 31, 1998 $ 37,004 $ (274) $37,278
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
16
<PAGE> 17
NET 2 L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,992 $2,364 $2,308
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,392 1,210 1,137
Increase in rents receivable, net (223) (238) (280)
Gain on sale of property, net (4,516) -- --
(Increase) decrease in other assets (140) (111) 269
Increase (decrease) in accrued interest payable 81 35 (6)
(Decrease) increase in accounts payable and other liabilities (134) 110 16
------- ------- ------
Net cash provided by operating activities 3,452 3,370 3,444
------- ------- ------
Cash flows from investing activities:
Proceeds from sale of properties 11,802 -- --
Investments in real estate (23,828) (2,419) --
------- ------- ------
Net cash used in investing activities (12,026) (2,419) --
------- ------- ------
Cash flows from financing activities:
Proceeds of mortgage notes payable 34,363 -- 2,800
Principal payments on mortgage notes (14,950) (560) (340)
Increase in deferred expenses (206) -- (66)
(Increase) decrease in restricted cash (9,861) 100 (11)
Cash distributions to partners (2,435) (2,435) (2,435)
------- ------- ------
Net cash provided by (used in) financing activities 6,911 (2,895) (52)
------- ------- ------
Net (decrease) increase in cash and cash equivalents (1,663) (1,944) 3,392
Cash and cash equivalents at beginning of year 2,181 4,125 733
--------- ------- ------
Cash and cash equivalents at end of year $ 518 $ 2,181 $4,125
======= ======= ======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,196 $ 1,840 $1,574
======= ======= ======
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
On June 6, 1997, in connection with the acquisition of a property in Westland,
Michigan, the Partnership assumed approximately $4.7 million of first mortgage
financing.
See accompanying notes to financial statements.
17
<PAGE> 18
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. The Partnership and Basis of Presentation
Net 2 L.P. (the "Partnership") was formed as a limited partnership on
November 9, 1988 under the laws of the State of Delaware to invest in real
estate properties or interests therein net leased to corporations or other
entities. The Partnership terminates on December 31, 2028, unless sooner
terminated by law.
On January 10, 1989, the Partnership commenced the sale of up to 500,000
Units of limited partnership interests at $100 per Unit with the option to
offer an additional 50,000 Units. On July 19, 1990, the Partnership held
the final admission of Limited Partners. The Partnership raised a total of
$47.742 million (477,417 Units) from 2,396 investors and the offering was
terminated. The Partnership returned a capital contribution of $25,000
(250 Units) to a limited partner admitted in December 1989. No additional
Units have been returned nor repurchased since 1990.
Pursuant to the partnership agreement, limited partnership units may be
repurchased at 90% of the net asset value 60 days after the offer to
repurchase has been made.
As of December 31, 1998, there were 2,049 investors holding 477,167
limited partnership units.
2. Summary of Significant Accounting Policies
The Partnership's financial statements are prepared on the accrual basis
of accounting for financial reporting purposes.
Real estate assets are stated at cost, less accumulated depreciation. If
there is an event or change in circumstance that indicates an impairment
in the value of a property has occurred, the Partnership's policy is to
assess any impairment in value by making a comparison of the current and
projected operating cash flows of each such property over its remaining
useful life, on an undiscounted basis, to the carrying amount of the
property. If such carrying amounts are in excess of the estimated
projected operating cash flows of the property, the Partnership would
recognize an impairment loss equivalent to an amount required to adjust
the carrying amount to its estimated fair market value. No such impairment
loss has occurred. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
All direct costs associated with the acquisition of real estate are
capitalized.
Depreciation is determined by the straight-line method over the remaining
estimated economic useful lives of the properties. The Partnership
generally depreciates buildings over a 40-year period.
Rental revenue is recognized on a straight-line basis over the minimum
lease terms.
(Continued)
18
<PAGE> 19
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
2. Continued
The Partnership considers all highly liquid instruments with maturity of
three months or less from the date of purchase to be cash equivalents.
As of December 31, 1998, the restricted cash represents proceeds from
the sale of a property restricted for investment in future acquisitions.
Deferred expenses are comprised of loan fees which are amortized using the
straight-line method over the terms of the loans.
The Partnership uses the accrual basis of accounting for Federal income
tax purposes. No provision for income taxes has been made as the liability
for any such taxes is that of the partners rather than the Partnership.
Income per Unit amounts were calculated by using the weighted average
number of Units outstanding for each year and allocating the income
attributable for that year to the Limited Partners. The weighted average
number of Units outstanding for each of the years in the three-year ended
December 31, 1998 was 477,167.
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of
Financial Instruments, defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. The Partnership's cash, mortgage notes payable,
and accounts payable and accrued liabilities are considered to be
financial instruments and are carried at cost, which approximates fair
value.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," were issued. SFAS No. 130 established standards for
reporting and displaying comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for earlier
periods, provided for comparative purposes, is required. The statement
also requires the accumulated balance of other comprehensive income to be
displayed separately from retained earnings and additional paid-in capital
in equity section of the balance sheet. SFAS No. 131 establishes standards
for reporting information about operating segments in annual and interim
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. Categories required to
be reported as well as reconciled to the financial statements are segment
profit or loss, certain specific revenue and expense items, and segment
assets. SFAS No. 130 and No. 131 are effective for fiscal years beginning
after December 15, 1997. The adoption of these standards had no impact on
the Partnership's financial position and operating results as of and for
the year ended December 31, 1998.
Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts
of revenue and expenses to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(Continued)
19
<PAGE> 20
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
2., Continued
Certain amounts included in the prior years' financial statements have
been reclassified to conform with the current years' presentation.
3. The Partnership Agreement
Pursuant to the terms of the Partnership Agreement, the General Partner is
liable for all general obligations of the Partnership to the extent not
paid by the Partnership. The Limited Partners are and will not be liable
for the debts of the Partnership beyond their contributed capital.
Distributable cash from operations, as defined in the Partnership
Agreement, is generally to be distributed 98% to the Limited Partners and
2% to the General Partner until each limited partner has received total
distributions from operations equal to an 11% cumulative non-compounded
preferred return. Thereafter, such distributions are to be made 90% to the
Limited Partners and 10% to the General Partner.
Distributable cash from capital transactions, as defined, is generally to
be distributed 99% to the Limited Partners and 1% to the General Partner
until each limited partner has received total distributions from capital
transactions equal to an 11% cumulative non-compounded preferred return
plus a return of its capital contribution. Thereafter, such distributions
are to be made 85% to the Limited Partners and 15% to the General Partner.
For financial reporting purposes, all items of income are allocated in the
same proportion as distributions of distributable cash.
Distributable cash attributed to a particular limited partner's Unit is
calculated from the date of admission to the Partnership. The unpaid
cumulative preferred return at December 31, 1998 totaled $24.194 million
($49.46 to $51.40 per Unit, per close). On January 29, 1999, the
cumulative preferred return that was unpaid at December 31, 1998 was
reduced by a cash distribution to the Limited Partners for the quarter
ended December 31, 1998 totaling $596,459 ($1.25 per unit). The General
Partner received a cash distribution of $12,173 on January 29, 1999.
Cash distributions paid per Unit of limited partnership interest for each
of the years in the three-year period ended December 31, 1998 was $5.00.
The Partnership Agreement was restated and amended on June 13, 1994, which
enables the Partnership to make additional real estate investments.
Taxable income, as defined, before depreciation, generally is allocated in
the same proportion as distributions of distributable cash or proceeds
from capital transactions (other than the portion of such proceeds
constituting a return of capital). Depreciation and amortization expense,
to the extent that it does not exceed income before depreciation for such
year, shall be allocated in the same ratio as taxable income. Any excess
of such depreciation deductions shall be allocated 98% to the Limited
Partners and 2% to the General Partner. For financial reporting purposes,
all items of income are allocated in the same proportion as distributions
of distributable cash or proceeds from capital transactions.
20
<PAGE> 21
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
4. Investments in Real Estate
Following is a detailed schedule of the Partnership's real estate,
including properties held for sale, and lease terms at December 31, 1998:
<TABLE>
<CAPTION>
Annualized
Base Rent
Acquisition at
Date of Cost 12/31/98 Lease(s) Square
Acquisition Tenant Location ($000's) ($000's) Expires Feet
- ----------- ------------------------ -------------------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
02-28-89 Tranzonic Cos. Highland Heights, OH $ 5,822 $ 677 03/09 94,657
02-28-89 Tranzonic Cos. Tempe, AZ 1,548 180 03/09 49,951
1989 Total Petroleum, Inc. Various (12) 8,474 725 05/11 77,846
03-05-90 Everest & Jennings Earth City, MO 4,377 323 08/02 147,000
06-19-90 Diamond Shamrock Corp. El Paso, TX(*) 474 61 06/10 3,200
06-19-90 National Convenience
Stores, Inc. Various (13)(*) 4,367 507 12/12 33,830
09-14-90 Ameritech Services, Inc. Columbus, OH 2,450 245 08/05 20,000
09-28-90 RCS of Tucson Tucson, AZ 1,681 314 09/10 28,591
06-22-94 Kohl's Dept. Stores Eau Claire, WI 4,187 435 01/15 76,164
12-23-94 A-Copy, Inc. Milford, CT 2,949 315 12/04 27,360
09-21-95 Duracraft Corp. Southborough, MA 4,166 412 09/15 57,698
06-05-97 Wal-Mart Stores, Inc. Westland, MI 7,904 753 01/09 102,826
07-24-98 Best Buy Inc. Canton, OH 5,301 465 02/18 46,371
07-24-98 Best Buy Inc. Spartanburg, SC 4,518 395 02/18 45,800
09-29-98 Hollywood Video Stores
Inc. Wilsonville, OR 14,009 1,345 11/08 122,853
------- ------ -------
Total $72,227 $7,152 934,147
======= ====== =======
</TABLE>
(*) As of December 31, 1998, thirteen of the fourteen properties are held
for sale.
During the year, the Partnership sold the Sandusky and Seattle Properties
for a net proceeds of $11.8 million and recognized a net gain of
approximately $4.5 million.
The following unaudited pro forma operating information for the years
ended December 31, 1998 and 1997, were prepared as if the properties
acquired in 1997 and 1998 and the properties disposed in 1998, have been
consummated as of January 1, 1997 and the effect carried forward through
December 31, 1997 and 1998. The information provided does not purport to
be indicative of what the operating results of the Partnership would have
been had the acquisition been consummated on the date assumed. The pro
forma amounts (in thousands, except per Unit amounts) follow:
<TABLE>
<CAPTION>
Unaudited Pro Forma Unaudited Pro Forma
Year ended Year ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues $ 7,674 $ 7,248
Income before gain on
sale of properties $ 2,533 $ 2,499
Income per Unit of
limited partnership
interest before gain
on sale of properties $4.57 to $ 5.63 $4.44 to $5.61
=============== ==============
</TABLE>
21
<PAGE> 22
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
4., Continued
The Partnership has been incurring costs relating to environmental
investigation and re-mediation related to the Total Petroleum properties.
If the cost exceeds $10,000 for any one property, the Partnership applies
for reimbursements in excess of $10,000 to the Michigan Underground
Storage Tank Financial Assurance Fund ("MUSTFA"). All claims are subject
to approval by MUSTFA. These costs are not expected to have a material
impact on the financial position or results of operations of the
Partnership. The Partnership has received partial reimbursement of such
costs which were included in interest and other income in the accompanying
statements of income.
5. Mortgage Notes Payable
Following is a detailed schedule of the Partnership's mortgage notes
payable as of December 31, 1998 and 1997 ($000's):
<TABLE>
<CAPTION>
Mortgage notes payable Scheduled
as of December 31, Interest Balloon Debt Service
Property Location 12/31/98 12/31/97 Rate Maturity Payment in 1998
----------------- -------- -------- ---- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Nations Credit $24,440 $11,233 Variable 5/00 $23,753 $1,474
Eau Claire, WI 2,777 2,864 8% 7/14 -- 313
Southborough, MA 2,610 2,686 7.5% 9/15 -- 275
Westland, MI 5,055 5,323 7.5% 9/09 -- 683
Canton, OH 3,626 -- 7.15% 8/23 -- 104
Spartanburg, SC 3,011 -- 7.15% 8/23 -- 87
------- ------- ------
Total $41,519 $22,106 $2,936
======= ======= ======
</TABLE>
On October 29, 1998, the Partnership received an increase on the line of
credit of up to $24.5 million bearing interest at a rate of 315 basis
points over LIBOR. As of December 31, 1998, the outstanding balance on
the line of credit was $24.44 million with an interest rate of 8.77%. The
line of credit matures on May 1, 2000.
The line of credit is secured by mortgages on thirty-three of the
thirty-eight properties and by a negative declaration by the Partnership
that the Properties owned will not be mortgaged to secure any other
indebtedness. If the appraised value of the collateral falls below certain
specified levels, the Partnership will be required to provide additional
security or to prepay a portion of the loan. The mortgage note is recourse
to the Partnership but not to its Limited or General Partners. The loan
may be prepaid, subject to certain prepayment penalties, as defined.
Required principal payments of the mortgage notes payable for the
succeeding five years are as follows ($000's):
<TABLE>
<CAPTION>
Year ending December 31 Amounts
----------------------- -------
<S> <C>
1999 $ 1,062
2000 24,594
2001 681
2002 734
2003 791
</TABLE>
22
<PAGE> 23
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
6. Leases
Minimum future rental payments receivable under noncancelable operating
leases for the properties as of December 31, 1998, are as follows
($000's):
<TABLE>
<CAPTION>
Year Ending December 31 Amounts
<S> <C>
1999 $ 7,232
2000 7,304
2001 7,354
2002 7,387
2003 7,236
Thereafter 55,284
--------
Total $ 91,797
========
</TABLE>
The leases are net leases requiring the lessees to pay all taxes,
insurance, maintenance, and all other similar charges and expenses
relating to the properties and their use and occupancy.
Each of the following properties accounted for 10% or more of rental
revenues for the years ended December 31,:
<TABLE>
<CAPTION>
Property 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
Tranzonic (a) 12% 14% 15%
Total Petroleum (b) 12% 14% 16%
Westland 12% - -
NCS (c) 10% 11% 13%
Art Institute of Seattle -- 19% 20%
</TABLE>
(a) These properties consist of two office/warehouse
facilities, one in Ohio and one in Arizona.
(b) These properties consist of thirteen retail stores.
(c) These properties consist of fourteen retail stores.
7. Related Parties
The General Partner has granted Lexington Corporate Properties Trust (the
"Company"), whose chairman and Co-Chief Executive Officer is chairman of
the General Partner, an option exercisable at any time, to acquire the
general partnership interest. The Company provides the Partnership
various administrative services. Under the terms of the option, the
Company, subject to review of any such transactions by the independent
members of its Board of Trustees, may acquire the general partnership
interest at its fair market value based upon a formula relating to
partnership cash flows, with the Company retaining the option of paying
such fair market value in securities of the Company, limited partnership
units in controlled subsidiaries, cash or a combination thereof.
Leased Properties Management, Inc., an affiliate of the General Partner,
is entitled to receive a fee for managing the Partnership's properties in
the amount of 1% of gross annual rental receipts (or a greater amount in
certain circumstances). For the years ended December 31, 1998, 1997 and
1996, management fees which are included in general and administrative
expenses totaled $66,000, $57,000 and $52,000, respectively.
(Continued)
23
<PAGE> 24
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
7., Continued
Officers of affiliates of the General Partner and Lexington Corporate
Properties Trust received acquisition fees totaling $348,400 and $70,500
for the years ended December 31, 1998 and 1997, respectively.
Beginning in October 1996, Lexington Corporate Properties Trust has been
reimbursed by the Partnership for various administrative services
performed. For the years ended December 31, 1998, 1997 and 1996, such
reimbursements totaled $240,000, $170,000 and $109,000, respectively.
8. Subsequent Events
On October 16, 1998, the Partnership entered into an agreement to purchase
a property located in Ocala, Florida for approximately $19.5 million. The
property consist of approximately 696,597 square foot warehouse and
distribution building, net leased to Associated Grocers of Florida, Inc.
through December 31, 2018. The partnership obtained financing on January
5, 1999. The acquisition closed on January 7, 1999.
On November 5, 1998, the Partnership entered into an agreement to sell
thirteen of the fourteen NCS Properties for approximately $5.425 million.
As of December 31, 1998, the book value of the properties was
approximately $4.65 million, including rent receivable of approximately
$526,000. The sale closed on January 25, 1999.
24
<PAGE> 25
Schedule III
NET 2 L. P.
Real Estate and Accumulated Depreciation
December 31, 1998, 1997, and 1996
Initial cost to Partnership and gross amount
at which carried at end of period (A)
(In thousands)
<TABLE>
<CAPTION>
Building & Accumulated Date Date
Description Encumbrances Land Improvements Total (C) Depreciation (D) Acquired Constructed
- ----------- ------------ ---- ------------ --------- ---------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Office/Industrial (E) $ 3,910 (B) 732 6,638 7,370 1,639 February 28, 1989 various
Retail, Michigan (F) 4,449 (B) 2,017 6,457 8,474 1,508 June, July and various
August 1989
Industrial, Earth City, Missouri 2,322 (B) 652 3,725 4,377 1,010 March 5, 1990 1985
Retail, Texas 2,569 (B) 210 80 290 22 June 19, 1990 1980
Industrial, Columbus, Ohio 892 (B) 505 1,945 2,450 403 September 14, 1990 1989
Office, Tucson, Arizona 1,300 (B) 402 1,279 1,681 265 September 28, 1990 1988
Retail, Eau Claire, WI 2,777 815 3,372 4,187 381 June 22, 1994 1993 & 1994
Office, Milford, CT 1,565 (B) 630 2,319 2,949 233 December 23, 1994 1994
Office, Southborough, MA 2,610 400 3,766 4,166 310 September 21, 1995 1984
Retail, Westland, Michigan 5,055 2,000 5,904 7,904 228 June 5, 1997 1987
Retail, Canton, Ohio 3,626 1,200 4,101 5,301 45 July 24, 1998 1995
Retail, Spartanburg, SC 3,011 1,050 3,468 4,518 38 July 24, 1998 1996
Office, Wilsonville, Oregon 7,433 (B) 1,100 12,909 14,009 82 September 29, 1998 1980
------- ------ ------ ------ -----
$ 41,519 11,713 55,963 67,676 6,164
======= ====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Life on which
depreciation
in latest income
statements
Description is computed
- ----------- -----------
<S> <C>
Office/Industrial (E) 40 years
Retail, Michigan (F) 40 years
Industrial, Earth City, Missouri 40 years
Retail, Texas 40 years
Industrial, Columbus, Ohio 40 years
Office, Tucson, Arizona 40 years
Retail, Eau Claire, WI 40 years
Office, Milford, CT 40 years
Office, Southborough, MA 40 years
Retail, Westland, Michigan 40 years
Retail, Canton, Ohio 40 years
Retail, Spartanburg, SC 40 years
Office, Wilsonville, Oregon 40 years
</TABLE>
- ----------
(A) The initial cost includes the purchase price paid by the Partnership and
acquisition fees and expenses. The total cost basis of the Partnership's
properties at December 31, 1998 for Federal income tax purposes was
$62,148.
(B) The mortgage note is allocated based on the cost of the real estate.
(C) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 56,882 $ 49,610 $ 49,893
Additions during year 23,828 7,904 --
Properties held for sale (4,551) (632) --
Sale of properties (8,483) -- --
Write-off of fully depreciated property -- -- (283)
------- ------- -------
Balance at end of year $ 67,676 $ 56,882 $ 49,610
======= ======= =======
</TABLE>
(D) Reconciliation of accumulated depreciation:
<TABLE>
<S> <C> <C> <C>
Balance at beginning of year $ 7,160 $ 6,192 $ 5,481
Properties held for sale (427) -- --
Sale of properties (1,807) (106) (283)
Depreciation expense 1,238 1,074 994
------- ------- -------
Balance at end of year $ 6,164 $ 7,160 $ 6,192
======= ======= =======
</TABLE>
(E) These properties consist of two office/warehouse facilities, one in Ohio
constructed in 1968 and one in Arizona constructed in 1981.
(F) These properties consist of 12 retail stores.
25
<PAGE> 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
26
<PAGE> 27
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The Partnership is a limited partnership and has no directors or officers.
The General Partner of the Partnership is Lepercq Net 2 L.P., a Delaware limited
partnership. Lepercq Net 2 Inc., a Delaware corporation, is the general partner
of the General Partner. The directors and executive officers of Lepercq Net 2
Inc. are discussed below. The directors and executive officers of Lepercq Net 2
Inc. are responsible for the management of the Partnership's business including,
but not limited to, the acquisition of, sale of, financing or refinancing of,
making certain major capital improvements to, or leasing of, Partnership
properties.
The General Partner has granted Lexington corproate Properties Trust (the
"Company"), whose chairman and Co-Chief Executive Officer is chairman of the
General Partner, an option exercisable at any time, to acquire the general
partnership interest. The Company privided the Partnership various
administrative services. Under the terms of the option, the Company, subject to
review of any such transaction by the independent members of its Board of
Trustees, may acquire the general partnership interest at its fair market value
based upon a formula relating to partnership cash flows, with the Company
retaining the option of paying such fair market value in securities of the
Company, limited partnership units in controlled subsidiaries, cash or a
combination thereof.
The directors and executive officers of Lepercq Net 2 Inc. are as follows:
Name Position
---- --------
E. Robert Roskind President and Secretary
Denise E. DeBaun Vice President
David J. Walsh Vice President and Treasurer
Dianne R. Smith Assistant Secretary
Certain biographical information relating to the directors and executive
officers of Lepercq Net 2 Inc. is set forth below.
E. Robert Roskind, age 54, has been associated with LCP since 1973 and has been
Chairman of LCP since September 1976. He also serves as Chairman of the Board
and Co-Chief Executive Officer of Lexington Corporate Properties Trust, a real
estate investment trust traded on the New York Stock Exchange. Mr. Roskind is a
graduate of the University of Pennsylvania and Columbia Law School, and has been
a member of the New York Bar since 1970. Mr. Roskind is a director of Berkshire
Realty Company, Inc., Krupp Government Income Trust I and Krupp Government
Income Trust II.
Denise E. DeBaun, age 48, has been associated with LCP since 1981. She was a
member of the marketing department from 1986 to 1990. She also serves as an
Administrative Assistant of Lexington Corporate Properties Trust, a real estate
investment trust traded on the New York Stock Exchange. Ms. DeBaun is a graduate
of Hunter College of the City University of New York.
27
<PAGE> 28
David J. Walsh, age 32, has been associated with LCP since 1993. He has served
as Senior Vice President of LCP since January 1997 and as Director of
Acquisitions since June 1993. Prior to joining LCP, Mr. Wash was associated with
Glaxo Inc., a Fortune 500 pharmaceutical company, as a Pharmaceutical Sales
Representative. Mr. Walsh received his bachelor's degree from Western New
England College in 1989.
Dianne R. Smith, age 52, has been associated with LCP since 1988 as their
Paralegal. Ms. Smith also serves as the Paralegal to Lexington Corporate
Properties Trust, a real estate investment trust traded in the New York Stock
Exchange. Ms. Smith is a graduate of New York University where she received her
Paralegal degree.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The General Partner is entitled to receive a share of cash distributions when
and as cash distributions are made to the Limited Partners, and a share of
taxable income or loss. Cash distributions of $49,000 were made to the General
Partner in 1998.
The directors and executive officers of Lepercq Net 2 Inc. received no
remuneration from the Partnership.
The General Partner and its affiliates were paid certain fees and commissions
and reimbursed for certain expenses.
Information concerning the cash distributions to the General Partner, and fees,
commissions and reimbursements paid to it or its affiliates, is contained in the
Statements of Changes in Partners' Capital (Deficit) and in Notes 3 and 7 of
Notes to Financial Statements in Item 8 above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
(a) No person is known to the Partnership to be the beneficial owner of more
than 5% of the Units.
(b) None of the directors and executive officers of Lepercq Net 2 Inc. owns
any Units as of December 31, 1998.
(c) Lexington Corporate Properties Trust, an affiliate of the General Partner,
owns 3,843 units as of December 31, 1998.
28
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The Partnership reimburses the General Partner or its affiliates for expenses
incurred and may pay interest on loans made in connection with acquisitions.
Leased Properties Management, Inc., an affiliate of the General Partner, is
entitled to receive a fee for managing the Partnership's Properties in the
amount of 1% of gross annual rental receipts (or a greater amount in certain
circumstances). For the years ended DEcember 31, 1998, 1997 and 1996,
management fees which are included in general and administrative expenses
totaled $66,000, $57,000 and $52,000, in 1998, 1997 and 1996, respectively.
Officers of affiliates of the General Partner and Lexington Corporate Properties
Trust received acquisition fees totaling $348,400 and $70,500 for the year ended
December 31, 1998 and 1997, respectively.
Beginning in October 1996, Lexington Corporate Properties Trust has been
reimbursed by the Partnership for various administrative services performed. For
the years ended December 31, 1998, 1997 and 1996, such reimbursements totaled
$240,000, $170,000 and $109,000, respectively.
Additional information with respect to the directors and officers and
compensation of the General Partner and affiliates is contained in Items 8, 10
and 11 above.
29
<PAGE> 30
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ----------------------------------------------------------------
FORM 8-K
- --------
(a) The following documents are filed as part of this Annual Report:
1. Financial Statements (see index to Financial Statements filed as
part of Item 8 of this Annual Report).
2. Financial Statement Schedule (see Index to Financial Statements
filed as part of Item 8 of this Annual Report).
3. Exhibits
(3) Amended and Restated Agreement of Limited Partnership dated as
of November 9, 1988 set forth as Exhibit A to the Prospectus
included in Registration Statement Number 33-25984 is
incorporated herein by reference.
Second Amended and Restated Agreement of Limited Partnership
dated as of June 13, 1994 is incorporated herein by reference.
(b) Reports on Form 8-K filed in the fourth quarter of 1998.
Form 8-K dated September 29, 1998, filed October 13, 1998. Provided
financial information for certain acquired property and pro forma
financial information for the Partnership.
(c) Exhibits. See (a)3 above.
Exhibit No. 27 Financial Data Schedule.
(d) Financial Statement schedules excluded from the Annual Report to Unit
holders.
None.
30
<PAGE> 31
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NET 2 L.P.
By: Lepercq Net 2 L.P.,
its general partner
By: Lepercq Net 2 Inc.,
its general partner
By: /s/ E. Robert Roskind By: /s/ Brenda Lubrin
--------------------------- ----------------------------
President Assistant Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this annual report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the date indicated.
Signature Title
--------- -----
/s/ E. Robert Roskind President and Secretary
-------------------------------
E. Robert Roskind
/s/ Denise E. DeBaun Vice President
-------------------------------
Denise E. DeBaun
/s/ David J. Walsh Vice President and Treasurer
-------------------------------
David J. Walsh
/s/ Dianne R. Smith Assistant Secretary
-------------------------------
Dianne R. Smith
Date: March 31, 1999
-------------------------------
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE BALANCE SHEET
AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 518
<SECURITIES> 0
<RECEIVABLES> 1,667
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 67,676
<DEPRECIATION> (6,164)
<TOTAL-ASSETS> 78,918
<CURRENT-LIABILITIES> 0
<BONDS> 41,519
0
0
<COMMON> 0
<OTHER-SE> 37,004
<TOTAL-LIABILITY-AND-EQUITY> 78,918
<SALES> 0
<TOTAL-REVENUES> 6,963
<CGS> 0
<TOTAL-COSTS> 1,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,277
<INCOME-PRETAX> 2,476
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,476
<DISCONTINUED> 4,516
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,992
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
