<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, 2000
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.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3497738
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 692-7200
---------------------
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interests
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</TABLE>
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 SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per Unit amounts)
September 30, 2000 (Unaudited) and December 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
Real estate, at cost $ 102,299 $ 81,925
Less: accumulated depreciation 7,477 5,968
--------- ---------
94,822 75,957
Cash and cash equivalents 1,069 566
Restricted cash - 12,508
Deferred expenses (net of accumulated amortization
of $427 and $184 in 2000 and 1999, respectively) 583 305
Rent receivable 1,359 957
Other assets 188 140
--------- ---------
$ 98,021 $ 90,433
========= =========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Mortgage notes payable $ 59,440 $ 51,927
Accrued interest payable 80 225
Accounts payable and other liabilities 508 301
--------- ---------
60,028 52,453
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Partners' capital (deficit):
General Partner (254) (254)
Limited Partners ($100 per Unit, 500,000 Units
authorized, 477,167 Units issued and outstanding) 38,247 38,234
--------- ---------
Total partners' capital 37,993 37,980
--------- ---------
$ 98,021 $ 90,433
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 3
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per Unit amounts)
Three and Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental $2,563 $2,624 $7,553 $7,568
Interest and other 80 64 354 236
------ ------ ------ ------
2,643 2,688 7,907 7,804
------ ------ ------ ------
Expenses:
Interest expense 1,290 1,213 3,557 3,482
Depreciation 541 539 1,509 1,508
Amortization of deferred expenses 141 34 243 153
General, administrative and other 165 153 559 527
Transaction costs 200 - 200 -
------ ------ ------ ------
2,337 1,939 6,068 5,670
------ ------ ------ ------
Income before gain on sale
of properties 306 749 1,839 2,134
Gain on sale of properties, net - 61 - 770
------ ------ ------ ------
Net income $ 306 $ 810 $1,839 $2,094
====== ====== ====== ======
Net income per Unit of limited
partnership interest $ 0.63 $ 1.66 $ 3.78 $ 5.96
====== ====== ====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 4
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 3,203 $ 3,531
-------- --------
Cash flows from investing activities:
Investment in real estate (20,374) (36,382)
Proceeds from sale of properties, net - 5,702
Decrease in restricted cash 12,508 9,861
-------- --------
Net cash used in investing activities (7,866) (20,819)
-------- --------
Cash flows from financing activities:
Principal payments on mortgage notes (812) (1,391)
Proceeds of mortgage notes payable 31,750 21,207
Repayment of mortgage notes payable (23,425) -
Increase in deferred expenses (521) (178)
Cash distributions to partners (1,826) (1,826)
-------- --------
Net cash provided by financing activities 5,166 17,812
-------- --------
Net increase in cash and cash equivalents 503 524
Cash and cash equivalents at beginning of period 566 518
-------- --------
Cash and cash equivalents at end of period $ 1,069 $ 1,042
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,702 $ 3,498
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 real estate properties or interests therein. As of September 30,
2000, the Partnership owned interests in sixteen properties.
As of September 30, 2000, 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 a fair statement
of condition and 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/A for
the year ended December 31, 1999.
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.
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, 2000 totaled
$29.204 million ($59.96 to $61.90 per Unit, per close). On October
30, 2000, the cumulative preferred return that was unpaid at
September 30, 2000 was reduced by a cash distribution to the Limited
Partners for the three months ended September 30, 2000 totaling
$596,459 ($1.25 per Unit). The General Partner received a cash
distribution of $12,173 in October 2000.
<PAGE> 6
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Properties
During the nine months ended September 30, 2000, the Partnership
entered into the following real estate transactions:
<TABLE>
<CAPTION>
Lease Net
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Transactions Tenant Location ($000's) ($000's) (month/year) Feet
------------ ------ -------- -------- -------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
March 20 Nextel Comm. of the
Mid-Atlantic, Inc. Hampton, VA $ 12,347 $ 1,167 12/09 100,632
May 19 Johnson Controls, Inc. Plymouth, MI 8,027 740 12/06 134,160
------- ------ -------
$ 20,374 $ 1,907 234,792
====== ===== =======
</TABLE>
The following unaudited pro forma operating information for the nine months
ended September 30, 2000 and 1999, were prepared as if the 2000 and 1999
acquisitions and dispositions were consummated as of January 1, 1999. This
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,
2000 1999
---- ----
<S> <C> <C>
Revenues $ 8,462 $ 8,319
Expenses 6,321 5,893
----- -----
Net income $ 2,141 $ 2,426
===== =====
Net income per Unit of
limited partnership interest $ 4.40 $ 4.98
===== =====
</TABLE>
The tenant of the Partnership's property in Earth City, Missouri, has
declared bankruptcy. On June 30, 2000, this tenant, who represented
approximately 3% of annualized rental revenue, has rejected the
lease. The Partnership expects to incur expenses such as real estate
property taxes, insurance and property repairs and maintenance.
5. Mortgage Notes Payable
On March 20, 2000, the Partnership obtained a $7.5 million mortgage
note secured by its Hampton, Virginia Property. The mortgage bears
interest at 8.27% per annum and matures on April 1, 2010. The note
requires yearly payments of principal and interest of approximately
$677,000 and a balloon payment of approximately $6.8 million at
maturity.
<PAGE> 7
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Continued
On May 19, 2000, the Partnership obtained financing with Key Bank in
the amount of $24.25 million with an interest rate of 250 basis
points over the London Interbank Offered Rate ("LIBOR"). The note
requires interest only payments and matures on January 10, 2001. The
note is secured by nine properties located in Alabama (1), Arizona
(2), Connecticut (1), Michigan (1), Ohio (2), Oregon (1) and South
Carolina (1).
6. Related Party Transactions
Leased Properties Management, Inc., an affiliate of Lexington
Corporate Properties Trust ("Lexington"), whose chairman and Co-Chief
Executive Officer is an officer and a shareholder 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, 2000 and 1999, property management fees, which are
included in general and administrative expenses, totaled $71,500 and
$71,100, respectively.
Lexington Realty Advisors, an affiliate of Lexington, received
acquisition fees totaling $120,000 for the nine months ended
September 30, 2000.
On May 19, 2000, the Partnership purchased from Lexington a property
located in Plymouth, Michigan for approximately $8 million.
Lexington is reimbursed by the Partnership for various administrative
services performed. For the nine months ended September 30, 2000 and
1999, such reimbursements totaled $130,000 and $221,000,
respectively.
7. Subsequent Event
On November 14, 2000, Lexington and Net 1 L.P. and Net 2 L.P.
announced that they entered into a merger agreement whereby Net 1
L.P. and Net 2 L.P. would merge into a subsidiary of Lexington. The
transaction is subject to customary closing conditions including the
approval of Lexington's shareholders and the limited partners of net
1 L.P. and Net 2 L.P.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-Q 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 that could cause
actual results to differ materially. In particular, among the factors that could
cause actual results to differ materially are failure to continue to qualify as
a real estate partnership, general business and economic conditions,
competition, increases in real estate construction costs, change in 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.
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, 2000 totaled $29.204
million ($59.96 to $61.90 per Unit, per close), and was reduced by $596,459
($1.25 per Unit) with the third quarter 2000 distribution paid in September
2000.
During the nine months ended September 30, 2000, the Partnership entered into
the following real estate transactions:
<TABLE>
<CAPTION>
Lease Net
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Transactions Tenant Location ($000's) ($000's) (month/year) Feet
------------ ------ -------- -------- -------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
March 20 Nextel Communications
of the Mid-Atlantic, Inc. Hampton, VA $ 12,347 $ 1,167 12/09 100,632
May 19 Johnson Controls, Inc. Plymouth, MI 8,027 740 12/06 134,160
------- ------ -------
$ 20,374 $ 1,907 234,792
====== ===== =======
</TABLE>
On March 20, 2000, the Partnership obtained a $7.5 million mortgage note secured
by its Hampton, Virginia Property. The mortgage bears interest at 8.27% per
annum and matures on April 1, 2010. The note requires yearly payment of
principal and interest of approximately $677,000 and a balloon payment of
approximately $6.8 million at maturity.
<PAGE> 9
On May 19, 2000, the Partnership obtained financing with Key Bank in the amount
of $24.25 million with an interest rate of 250 basis points over the London
Interbank Offered Rate ("LIBOR"). The note requires interest only payments and
matures on January 10, 2001. The note is secured by nine properties located in
Alabama (1), Arizona (2), Connecticut (1), Michigan (1), Ohio (2), Oregon (1)
and South Carolina (1).
The tenant of the Partnership's property in Earth City, Missouri, has declared
bankruptcy. On June 30, 2000, this tenant, who represented approximately 3% of
annualized rental revenue, has rejected the lease. The Partnership expects to
incur expenses such as real estate property taxes, insurance and property
repairs and maintenance.
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.
On November 14, 2000, Lexington and Net 1 L.P. and Net 2 L.P. announced that
they entered into a merger agreement whereby Net 1 L.P. and Net 2 L.P.would
merge into a subsidiary of Lexington. The transaction is subject to customary
closing conditions including the approval of Lexington's shareholders and the
limited partners of Net 1 L.P. and Net 2 L.P.
Results of Operations (In thousands)
<TABLE>
<CAPTION>
Increase (Decrease)
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999 2000 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 2,643 $ 2,688 $ 7,907 $ 7,804 $ (45) $ 103
----- ----- ----- ----- --- ---
Total expenses
Interest 1,290 1,213 3,557 3,482 77 75
Depreciation 541 539 1,509 1,508 2 1
Amortization 141 34 243 153 107 90
General, administrative
and other 165 153 559 527 12 32
Transaction costs 200 - 200 - 200 200
------ -------- ------ -------- --- ---
2,337 1,939 6,068 5,670 398 398
----- ----- ----- ----- --- ---
Income before gain on sale
of properties $ 306 $ 749 $ 1,839 $ 2,134 $ (443) $ (295)
=== === ===== ===== === ====
</TABLE>
The change in results of operations with respect to revenues, interest and
depreciation for the three and nine months ended September 30, 2000 are
primarily attributable to the acquisition and operation of the real property
investments acquired during the first nine months of 2000.
Rental revenues decreased in the three months ended September 30, 2000 due to
the vacancy of the Missouri property, whose tenant filed for bankruptcy and
rejected the lease.
Interest and other income, included in total revenues, decreased due to interest
earned on escrow accounts until the second quarter of 2000. The escrow accounts
were restricted under Internal Revenue Code Section 1031 for property
investments. These accounts were closed in June 2000.
General and administrative expenses did not materially change for the three and
nine months ended September 30, 2000. During the quarter ended September 30,
2000, the Partnership accrued costs relating to a proposed transaction.
<PAGE> 10
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, 2000, the Partnership's variable rate indebtedness
represented 41% of total long-term indebtedness. For the three and nine months
ended September 30, 2000, the variable rate indebtedness had a weighted average
interest rate of 9.17% and 9.30%, 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, 2000, would have been
approximately $62,000 and $180,000 less, respectively.
<PAGE> 11
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.
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
(b) Reports on form 8-K filed during the third
quarter ended September 30, 2000.
None.
<PAGE> 12
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 14, 2000 By: /s/ E. Robert Roskind
--------------------- -------------------------------------
E. Robert Roskind
President
