<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 June 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)
<TABLE>
<S> <C>
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
------------------
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
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Partnership Interests
</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)
June 30, 2000 (Unaudited) and December 31, 1999
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
Real estate, at cost $ 102,288 $ 81,925
Less: accumulated depreciation 6,936 5,968
------- -------
95,352 75,957
Cash and cash equivalents 1,192 566
Restricted cash - 12,508
Deferred expenses (net of accumulated amortization
of $286 and $184 in 2000 and 1999, respectively) 574 305
Rent receivable 1,206 957
Other assets 188 140
-------- --------
$ 98,512 $ 90,433
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and notes payable $ 59,663 $ 51,927
Accrued interest payable 213 225
Accounts payable and other liabilities 340 301
-------- --------
60,216 52,453
Partners' capital (deficit):
General Partner (247) (254)
Limited Partners ($100 per Unit, 500,000 Units
authorized, 477,167 Units issued and outstanding) 38,543 38,234
------ ------
Total partners' capital 38,296 37,980
------ ------
$ 98,512 $ 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 Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental $ 2,780 $ 2,687 $ 4,990 $ 4,944
Interest and other 149 11 274 172
------ ------- ------ --------
2,929 2,698 5,264 5,116
----- ----- ----- -----
Expenses:
Interest expense 1,191 1,194 2,267 2,269
Depreciation 525 512 968 969
Amortization of deferred expenses 70 55 102 119
General, administrative and other 173 193 394 374
------ ------ ------ ------
1,959 1,954 3,731 3,731
----- ----- ----- -----
Income before gain on sale
of properties 970 744 1,533 1,385
Gain on sale of properties - - - 709
-------- -------- -------- ------
Net income $ 970 $ 744 $ 1,533 $ 2,094
===== ===== ===== =====
Net income per Unit of limited
partnership interest $ 1.99 $ 1.53 $ 3.15 $ 4.30
==== ==== ==== ====
</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)
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 2,333 $ 2,570
----- -----
Cash flows from investing activities:
Investment in real estate (20,363) (31,493)
Proceeds from sale of properties, net - 5,333
Decrease in restricted cash 12,508 5,034
------ --------
Net cash used in investing activities (7,855) (21,126)
------ -------
Cash flows from financing activities:
Principal payments on mortgage notes (589) (659)
Proceeds of mortgage notes payable 31,750 21,207
Repayment of mortgage notes payable (23,425) -
Increase in deferred expenses (371) (179)
Cash distributions to partners (1,217) (1,217)
------ ------
Net cash provided by financing activities 6,148 19,152
------ ------
Net increase in cash and cash equivalents 626 596
Cash and cash equivalents at beginning of period 566 518
------ ------
Cash and cash equivalents at end of period $ 1,192 $ 1,114
===== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,281 $ 2,291
===== =====
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
NET 2 L.P. AND CONSOLIDATED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 2000, the
Partnership owned interests in sixteen properties.
As of June 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 June 30, 2000 totaled $28.489 million
($58.46 to $60.40 per Unit, per close). On July 31, 2000, the cumulative
preferred return that was unpaid at June 30, 2000 was reduced by a cash
distribution to the Limited Partners for the three months ended June 30,
2000 totaling $596,459 ($1.25 per Unit). The General Partner received a
cash distribution of $12,173 in July 2000.
<PAGE> 6
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Properties
During the six months ended June 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 8,016 740 12/06 134,160
------- ------ -------
$ 20,363 $ 1,907 234,792
====== ===== =======
</TABLE>
The following unaudited pro forma operating information for the six
months ended June 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)
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Revenues $ 5,819 $ 5,583
Expenses 3,974 3,948
----- -----
Net income $ 1,845 $ 1,635
===== =====
Net income per Unit of
limited partnership interest $ 3.79 $ 3.36
==== ====
</TABLE>
The tenant of the Partnership's property in Earth City, Missouri, has
declared bankruptcy. On June 30, 2000, this tenant, who represents
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. Mortgages and 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 1, 2000, the Partnership received an extension of up to thirty
days on its $24.5 million line of credit. 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 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 six months ended June 30, 2000 and
1999, property management fees, which are included in general and
administrative expenses, totaled $47,000 for each period.
Lexington Realty Advisors, 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, received
acquisition fees totaling $120,000 for the six months ended June 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 six months ended June 30, 2000 and 1999 such
reimbursements totaled $84,000 and $134,000, respectively.
<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 June 30, 2000 totaled $28.489 million
($58.46 to $60.40 per Unit, per close), and was reduced by $596,459 ($1.25 per
Unit) with the second quarter 2000 distribution paid in July 2000.
During the six months ended June 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 $ 12,287 $ 1,167 12/09 100,632
May 19 Johnson Controls, Inc.
Plymouth, MI 8,016 740 12/06 134,160
------- ------ -------
$ 20,363 $ 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.
On May 1, 2000, the Partnership received an extension of up to thirty days on
its $24.5 million line of credit. 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 represents 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.
<PAGE> 9
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.
Results of Operations (In thousands)
<TABLE>
<CAPTION>
Increase (Decrease)
------------------------
Three months Six months Three months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 2,929 $ 2,698 $ 5,264 $ 5,116 $ 231 $ 148
----- ----- ----- ----- --- ---
Total expenses
Interest 1,191 1,194 2,267 2,269 (3) (2)
Depreciation 525 512 968 969 13 (1)
Amortization 70 55 102 119 15 (17)
General, administrative
and other 173 193 394 374 (20) 20
------ ------ ------ ------ ----- --
1,959 1,954 3,731 3,731 252 247
----- ----- ----- ----- --- ---
Income before gain on sale
of properties $ 970 $ 744 $ 1,533 $ 1,385 $ 14 $ (64)
===== ===== ===== ===== ==== ===
</TABLE>
The change in results of operations with respect to revenues, interest and
depreciation for the three and six months ended June 30, 2000 are primarily
attributable to the acquisition and operation of the real property investments
acquired during the first six months of 2000.
Interest and other income, included in total revenues, increased due to interest
earned on escrow accounts, restricted under Internal Revenue Code Section 1031
for property investments.
General and administrative expenses decreased in the three months ended June 30,
2000 and increased in the six months ended June 30, 2000 due to property
operating expenses.
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 June 30, 2000, the Partnership's variable rate indebtedness
represented 39% of total long-term indebtedness. For the three and six months
ended June 30, 2000, the variable rate indebtedness had a weighted average
interest rate of 9.6% and 9.36%, respectively. Had the weighted average interest
rates been 100 basis points higher, the Partnership's net income for the three
and six months ended June 30, 2000, would have been approximately $274,000 and
$327,000 less, respectively.
<PAGE> 10
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
99 $24.25 Million Secured Term Loan Agreement
(b) Reports on form 8-K filed during the second quarter ended
June 30, 2000.
(1) Form 8-K dated March 20, 2000, filed April 4, 2000. Provided
financial information for certain acquired property located
in Hampton, Virginia and pro forma financial information for
the Partnership.
<PAGE> 11
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: August 14, 2000 By: /s/ E. Robert Roskind
-------------------------- ----------------------
E. Robert Roskind
President
