<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____________ to ____________
Commission File Number 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 .
--- ---
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant.
Not Applicable.
There is no active public market for the units of limited partnership interests
issued by the Registrant.
<PAGE> 2
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NET 2 L.P. AND CONSOLIDATED PARTNERSHIPS
CONSOLIDATED BALANCE SHEETS
(In thousands, except Units and per Unit amounts)
September 30, 1999 (Unaudited) and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Real estate, at cost $ 103,768 $ 67,676
Less: accumulated depreciation 7,649 6,164
--------- ---------
96,119 61,512
Properties held for sale - 4,624
Cash and cash equivalents 1,042 518
Restricted cash - 9,861
Deferred expenses, net 454 429
Rent receivable 2,101 1,693
Other assets 27 281
--------- ---------
$ 99,743 $ 78,918
========= =========
Liabilities and Partners' Capital
---------------------------------
Mortgage notes payable $ 61,335 $ 41,519
Accrued interest payable 200 216
Accounts payable and other liabilities 126 179
--------- ---------
61,661 41,914
--------- ---------
Partners' capital (deficit):
General Partner (252) (274)
Limited Partners ($100 per Unit, 500,000 Units
authorized, 477,167 Units issued and outstanding) 38,334 37,278
--------- ---------
38,082 37,004
--------- ---------
$ 99,743 $ 78,918
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 3
NET 2 L.P. AND CONSOLIDATED PARTNERSHIPS
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per Unit amounts)
Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental $2,624 $1,732 $7,568 $4,989
Interest and other 64 11 236 75
------ ------ ------ ------
2,688 1,743 7,804 5,064
------ ------ ------ ------
Expenses:
Interest expense 1,213 553 3,482 1,520
Depreciation 539 317 1,508 881
Amortization of deferred expenses 34 34 153 102
General and administrative 153 155 527 436
------ ------ ------ ------
1,939 1,059 5,670 2,939
------ ------ ------ ------
Income before gain on sale
of properties, net 749 684 2,134 2,125
Gain on sale of properties, net 61 4,527 770 4,516
------ ------ ------ ------
Net income $ 810 $5,211 $2,904 $6,641
====== ====== ====== ======
Net income per Unit of limited
partnership interest $ 1.66 $10.70 $ 5.96 $13.64
====== ====== ====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 4
NET 2 L.P. AND CONSOLIDATED PARTNERSHIPS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 3,531 $ 3,267
-------- --------
Cash flows from investing activities:
Proceeds from sale of properties, net 5,702 11,801
Decrease in restricted cash 9,861 -
Acquisition of properties (36,382) (23,827)
-------- --------
Net cash used in investing activities (20,819) (12,026)
-------- --------
Cash flows from financing activities:
Principal payments on mortgage notes (1,391) (1,147)
Proceeds of mortgage notes payable 21,207 9,863
Increase in deferred expenses (178) -
Cash distributions to partners (1,826) (1,826)
-------- --------
Net cash provided by financing activities 17,812 6,890
-------- --------
Net change in cash and cash equivalents 524 (1,869)
Cash and cash equivalents at beginning of period 518 2,181
-------- --------
Cash and cash equivalents at end of period $ 1,042 $ 312
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,498 $ 1,527
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
NET 2 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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
net leased real estate properties or interests therein.
As of September 30, 1999, the Partnership has a total of 477,167 Units
issued and outstanding held by approximately 2,000 limited partners.
The unaudited financial statements reflect all adjustments that are, in
the opinion of the General Partner, necessary to present a fair
statement of the results for the interim period presented. For a more
complete understanding of the Partnership's financial position and
accounting policies, reference is made to the financial statements
previously filed with the Securities and Exchange Commission with the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1998.
2. Summary of Significant Accounting Policies
Net income per Unit amounts were calculated by using the weighted
average number of Units outstanding for each period and allocating 98%
of the income attributable for that period to the Limited Partners. The
weighted average number of Units outstanding was 477,167 for all
periods presented.
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 revenues and expenses to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Certain amounts included in the prior year's financial statements have
been reclassified to conform to the current year's presentation.
3. The Partnership Agreement
For financial statement 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 September 30, 1999 totaled $26.34
million ($53.96 to $55.90 per Unit, per close). On October 29, 1999,
the unpaid cumulative preferred return was reduced by a cash
distribution to the Limited Partners totaling $596,459 ($1.25 per
Unit). The General Partner received a cash distribution of $12,173 on
October 29, 1999.
<PAGE> 6
NET 2 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Properties
During the nine months ended September 30, 1999, the Partnership
entered into the following real estate transactions:
<TABLE>
<CAPTION>
Lease Net
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Acquisition Tenant Location ($000's) ($000's) (month/year) Feet
----------- ------ -------- -------- -------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
January 8 Associated Grocers Ocala, FL $ 20,071 $ 1,872 12/18 696,597
March 23 Jones Apparel Bristol, PA 9,202 768 7/13 96,000
June 29 Wal-Mart Stores, Inc. Jacksonville, AL 2,220 146 1/09 56,132
August 4 Stone Container Corp. Columbia, SC 4,889 465 8/12 185,960
------- ------ ----------
$ 36,382 $ 3,251 1,034,689
====== ===== =========
</TABLE>
On January 25, 1999, the Partnership sold thirteen of the fourteen NCS
Properties for net proceeds of approximately $5.33 million, which
resulted in a gain of approximately $709,000.
The Jacksonville, Alabama and Columbia, South Carolina Properties were
purchased in cash from Lexington Corporate Properties Trust, whose
chairman is president of the General Partner.
On September 22, 1999, the Partnership sold the remaining NCS property
for net proceeds of approximately $369,000, which resulted in a gain of
approximately $61,000.
The following unaudited pro forma operating information for the nine
months ended September 30, 1999 and 1998, was prepared as if all
acquisitions and dispositions were consummated as of January 1, 1998.
The information does not purport to be indicative of what the operating
results of the Partnership would have been had the acquisitions and
dispositions been consummated on that date. Pro forma amounts are as
follows:
<TABLE>
<CAPTION>
Pro Forma
(In thousands, except per Unit amounts)
Nine months ended September 30,
1999 1998
---- ----
<S> <C> <C>
Revenues $ 8,316 $ 8,128
Expenses 5,942 6,123
----- -----
Net income $ 2,374 $ 2,005
===== =====
Net income per Unit of
limited partnership interest $ 4.88 $ 4.12
==== ====
</TABLE>
<PAGE> 7
NET 2 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Mortgage Notes Payable
During 1999, the Partnership obtained approximately $14.63 million and
$6.58 million in mortgages secured by its Ocala, Florida and Bristol,
Pennsylvania Properties, respectively. The mortgages bear interest at
7.25% per annum and mature on February 1, 2009 and April 1, 2009,
respectively. Balloon payments of $10,700,000 and $5,228,000 are
required at maturity. The notes require yearly payments of principal
and interest of $1,332,000 and $571,000, respectively.
6. Related Party Transactions
The LCP Group, L.P., 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 nine months ended September 30, 1999
and 1998, property management fees, which are included in general and
administrative expenses, totaled $71,000 and $48,000, respectively.
During 1999, the Partnership paid Lexington Corporate Properties Trust,
whose chairman is an officer of the General Partner, acquisition and
disposition fees totaling $337,000. In addition, the Jacksonville,
Alabama and Columbia, South Carolina Properties were purchased from
Lexington Corporate Properties Trust.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership attempts to maintain a working capital reserve equal to 1.5% of
the gross proceeds of its 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 cost requirements of the Partnership, additional
funds may be obtained through short-term or permanent loans or by reducing
distributions to limited partners.
The unpaid cumulative preferred return at September 30, 1999 totaled $26.34
million ($53.96 to $55.90 per Unit, per close), and was reduced by $596,459
($1.25 per Unit) with the distribution paid in October 1999.
During the nine months ended September 30, 1999, the Partnership entered into
the following real estate transactions:
<TABLE>
<CAPTION>
Lease Net
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Acquisition Tenant Location ($000's) ($000's) (month/year) Feet
----------- ------ -------- -------- -------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
January 8 Associated Grocers Ocala, FL $ 20,071 $ 1,872 12/18 696,597
March 23 Jones Apparel Bristol, PA 9,202 768 7/13 96,000
June 29 Wal-Mart Stores, Inc. Jacksonville, AL 2,220 146 1/09 56,132
August 4 Stone Container Corp. Columbia, SC 4,889 465 8/12 185,960
------- ----- ----------
$ 36,382 $ 3,251 1,034,689
====== ===== =========
</TABLE>
On January 25, 1999, the Partnership sold thirteen of the fourteen NCS
Properties for net proceeds of approximately $5.33 million, which resulted in a
gain of approximately $709,000.
The Jacksonville, Alabama and Columbia, South Carolina Properties were purchased
in cash from Lexington Corporate Properties Trust whose chairman is president of
the General Partner.
On September 22, 1999, the Partnership sold the remaining NCS property for net
proceeds of approximately $369,000, which resulted in a gain of approximately
$61,000.
During 1999, the Partnership obtained approximately $14.63 million and $6.58
million in mortgages secured by its Ocala, Florida and Bristol, Pennsylvania
Properties, respectively. The mortgages bear interest at 7.25% per annum and
mature on February 1, 2009 and April 1, 2009, respectively. Balloon payments of
$10,700,000 and $5,228,000 are required at maturity. The notes require yearly
payments of principal and interest of $1,332,000 and $571,000, respectively.
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.
<PAGE> 9
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 Partnership 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 Partnership has
determined that it will not be necessary to modify, update or replace its
computer hardware and software applications.
The vendor that provides the Partnership's existing general ledger software has
released a compliant version of its product, which the Partnership 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 Partnership 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 is
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 Partnership 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 Partnership 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.
Management has closely monitored the Partnership's entire Year 2000 compliance
function. At this time, the Partnership has not developed and does not
anticipate developing any contingency plans with respect to the Year 2000 issue.
<PAGE> 10
Results of Operations (in thousands)
- ------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease)
----------------------------------------
Three months ended Nine months ended Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998 1999 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 2,688 $ 1,743 $ 7,804 $ 5,064 $ 945 $ 2,740
----- ----- ----- ----- --- -----
Total expenses
Interest 1,213 553 3,482 1,520 660 1,962
Depreciation 539 317 1,508 881 222 627
Amortization 34 34 153 102 - 51
General, administrative
and other 153 155 527 436 (2) 91
------ ------ ------ ------ ----- -------
1,939 1,059 5,670 2,939 880 2,731
------ ------ ------ ------ ----- -------
Income before gain on
sale of properties, net $ 749 $ 684 $ 2,134 $ 2,125 $ 65 $ 9
====== ====== ===== ===== ==== =======
</TABLE>
The results of operations for the three and nine months ended September 30, 1999
are primarily attributable to the acquisition and operation of the real property
investments acquired from 1989 to 1999.
Total revenues for the three and nine months ended September 30, 1999 increased
due to the net effect of properties acquired in the first three quarters of
1999, offset by property sales.
Interest, depreciation and amortization expense increased in the three and nine
months ended September 30, 1999 due to acquisitions and additional debt
financing in the first three quarters of 1999.
General and administrative expenses increased in the nine months ended September
30, 1999 due to property appraisals performed on properties.
<PAGE> 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
------------------------------------------------
The Partnership's exposure to market risk relates to its variable rate credit
facility. As of September 30, 1999, the Partnership's variable rate indebtedness
represented 39% of total long-term indebtedness. For the three and nine months
ended September 30, 1999, the variable rate indebtedness had a weighted average
interest rate of 8.42% and 8.21%, respectively. Had the weighted average
interest rates been 100 basis points higher, the Partnership's net income for
the three and nine months ended September 30, 1999, would have been
approximately $62,000 and $185,000 less, respectively.
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Changes in Securities - not applicable.
ITEM 3. Defaults under the Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders - not applicable.
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on form 8-K filed during the third quarter ended
September 30, 1999.
None.
<PAGE> 13
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET 2 L.P.
By: Lepercq Net 2 L.P.
its general partner
By: Lepercq Net 2 Inc.
its general partner
Date: November 15, 1999 By: /s/ E. Robert Roskind
----------------- -----------------------
E. Robert Roskind
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AS CONTAINED IN THE PARTNERSHIP'S
FORM 10-Q FOR SUCH PERIOD. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-Q. DOLLARS ARE IN THOUSANDS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,042
<SECURITIES> 0
<RECEIVABLES> 2,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 103,768
<DEPRECIATION> (7,649)
<TOTAL-ASSETS> 99,743
<CURRENT-LIABILITIES> 0
<BONDS> 61,335
0
0
<COMMON> 0
<OTHER-SE> 38,082
<TOTAL-LIABILITY-AND-EQUITY> 99,743
<SALES> 0
<TOTAL-REVENUES> 7,804
<CGS> 0
<TOTAL-COSTS> 1,508
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,482
<INCOME-PRETAX> 2,134
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,134
<DISCONTINUED> 770
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,904
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
