<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
<TABLE>
<S> <C>
DELAWARE 13-3497738
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
C/O LEXINGTON CORPORATE PROPERTIES TRUST 10017
355 LEXINGTON AVENUE (ZIP CODE)
NEW YORK, NY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
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> 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.
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 for 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.
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.
3
<PAGE> 4
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 1999 1998 1997
- -------- ---- ---- ----
<S> <C> <C> <C>
Ocala, FL................................................... 21% -- --
Wilsonville, OR............................................. 15% -- --
Westland, MI................................................ 9% 12% --
Tranzonic (*)............................................... 9% 12% 14%
Total Petroleum (**)........................................ 8% 12% 14%
NCS (***)................................................... -- 10% 11%
Art Institute of Seattle (****)............................. -- -- 19%
</TABLE>
- ---------------
(*) These properties consist of two office/warehouse facilities, one in Ohio
and one in Arizona.
(**) These properties consist of thirteen retail stores and were sold on
December 28, 1999.
(***) These properties consist of fourteen retail stores and were sold on
January 25, 1999.
(****) This property was sold on September 29, 1998.
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
("Lexington"), whose chairman and Co-Chief Executive Officer is an officer and a
shareholder of the General Partner, an option exercisable at any time, to
acquire the general partnership interest. Under the terms of the option,
Lexington 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
Lexington retaining the option of paying such fair market value in securities of
Lexington, limited partnership units in controlled subsidiaries, cash or a
combination thereof. Lexington provides the Partnership with various
administrative services.
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.
4
<PAGE> 5
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. 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 financial condition and results of
operations, including 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 and lease
terms at December 31, 1999:
<TABLE>
<CAPTION>
LEASE(S) NET
ACQUISITION ANNUALIZED EXPIRATION RENTABLE
DATE OF COST BASE RENT DATE SQUARE
ACQUISITION TENANT LOCATION ($000'S) ($000'S) (MONTH/YEAR) FEET
- ----------- ------ -------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
2/28/89 Tranzonic Cos. ............... Highland Heights, OH $ 5,821 $ 702 03/09 94,657
2/28/89 Tranzonic Cos. ............... Tempe, AZ 1,548 186 03/09 49,951
3/5/90 Everest & Jennings............ Earth City, MO 4,377 323 08/02 147,000
9/14/90 Ameritech Services, Inc. ..... Columbus, OH 2,450 245 08/05 20,000
9/28/90 RCS of Tucson................. Tucson, AZ 1,681 357 09/10 28,591
6/22/94 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
6/5/97 Wal-Mart Stores, Inc. ........ Westland, MI 7,904 753 01/09 102,826
7/24/98 Best Buy Inc. ................ Canton, OH 5,301 465 02/18 46,350
7/24/98 Best Buy Inc. ................ Spartanburg, SC 4,518 395 02/18 45,800
9/29/98 Hollywood Video Stores, Wilsonville, OR 14,009 1,345 11/08 122,853
Inc. .........................
1/8/99 Associated Grocers of Ocala, FL 20,071 1,872 12/18 696,597
Florida.......................
6/29/99 Wal-Mart Stores, Inc. ........ Jacksonville, GA 2,211 146 1/09 56,132
8/4/99 Stone Container Corp. ........ Columbia, SC 4,898 465 8/12 185,960
------- ------ ---------
$81,925 $8,004 1,700,241
======= ====== =========
</TABLE>
In January 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.
In March 1999, the Partnership purchased a property located in Bristol,
Pennsylvania for approximately $9.2 million. The Partnership obtained
approximately $6.58 million in mortgage debt secured by the property.
In September 1999, the Partnership sold the remaining NCS property for net
proceeds of approximately $369,000, which resulted in a gain of approximately
$60,000.
In December 1999, the Partnership sold the property located in Bristol,
Pennsylvania and one in Southborough, Massachusetts for approximately $13.2
million. The Bristol, Pennsylvania and Southborough, Massachusetts Properties
were sold to Lexington, whose chairman and Co-Chief Executive Officer is an
officer and a shareholder of the General Partner. The sale resulted in a net
gain of approximately $276,000.
In December 1999, the Partnership sold twelve properties located in
Michigan for approximately $7.7 million. The sale resulted in a loss of
approximately $261,000.
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, 1999 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, 1999, there were 1,983 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, 1999 was $5.00.
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>
1999 1998 1997 1996 1995
-------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Rental revenue....... $10,086 $6,871 $5,934 $5,442 $5,146
============== ================ ============== ============== ==============
Net income........... $ 3,411 $6,992 $2,364 $2,308 $2,278
============== ================ ============== ============== ==============
Net income per Unit
of limited
partnership
interests(*)....... $6.24 to $7.53 $12.62 to $15.55 $4.20 to $5.30 $4.02 to $5.23 $3.87 to $5.23
============== ================ ============== ============== ==============
Total assets......... $90,433 $78,918 $55,001 $50,002 $47,658
============== ================ ============== ============== ==============
Mortgage notes
payable............ $51,927 $41,519 $22,106 $17,181 $14,721
============== ================ ============== ============== ==============
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
Consolidated Financial Statements and the related notes appearing elsewhere in
this report.
7
<PAGE> 8
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.
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 unpaid cumulative preferred return at December 31, 1999 totaled $27.057
million ($55.46 to $57.40 per Unit, per close), and was reduced by $596,459
($1.25 per Unit) with the fourth quarter 1999 distribution paid on January 31,
2000.
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.
During the year ended December 31, 1999, the Partnership acquired the
following properties:
<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>
1/8/99 Associated Grocers of Florida....... Ocala, FL $20,071 $1,872 12/18 696,597
3/23/99 Jones Apparel....................... Bristol, PA 9,203 778 07/13 96,000
6/29/99 Wal-Mart Stores, Inc. .............. Jacksonville, AL 2,211 146 01/09 56,132
8/4/99 Stone Container Corp. .............. Columbia, SC 4,898 465 08/12 185,960
------- ------ ---------
$36,383 $3,261 1,034,689
======= ====== =========
</TABLE>
8
<PAGE> 9
On January 8, 1999, the Partnership obtained approximately $14.63 million
in mortgages secured by its Ocala, Florida Property. The mortgage bears interest
at 7.25% per annum and matures on February 1, 2009. A balloon payment of
$10,700,000 is required at maturity. The note requires yearly payment of
principal and interest of $1,332,000.
The Jacksonville and the Columbia Properties were purchased from Lexington.
In January 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.
In September 1999, the Partnership sold the remaining NCS property for net
proceeds of approximately $369,000, which resulted in a gain of approximately
$60,000.
In December 1999, the Partnership sold the property located in Bristol,
Pennsylvania and one in Southborough, Massachusetts for approximately $13.2
million. The Bristol and the Southborough Properties were sold to Lexington.
Lexington assumed mortgage indebtedness in its purchase of these properties of
approximately $9.1 million. The sale resulted in a net gain of approximately
$276,000.
In December 1999, the Partnership sold twelve properties located in
Michigan for approximately $7.7 million. The sale resulted in a loss of
approximately $261,000.
As of December 31, 1999, the restricted cash represents proceeds from the
sale of properties restricted for investment in future acquisitions.
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, 1999, the outstanding balance on the line of credit was $23.59
million with an interest rate of 9.63%. The line of credit matures on May 1,
2000. The Partnership is currently exploring opportunities to either extend or
refinance this agreement.
Impact of Year 2000
To date there have been no situations that the General Partner is aware of,
where the Year 2000 issue has caused a computer system that effects the
Partnership or any of its properties to function improperly.
9
<PAGE> 10
Results of Operations
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------
1999 1998 1997 1999-1998 1998-1997
------- ------ ------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues............................ $10,334 $6,963 $6,083 $3,371 $880
------- ------ ------ ------ ----
Total expenses
Interest.................................. 4,696 2,277 1,875 2,419 402
Depreciation.............................. 2,049 1,238 1,074 811 164
Amortization.............................. 187 154 136 33 18
General and administrative................ 775 818 634 (43) 184
------- ------ ------ ------ ----
7,707 4,487 3,719 3,220 768
------- ------ ------ ------ ----
Income before gain on sale of properties,
net..................................... $ 2,627 $2,476 $2,364 $ 151 $112
======= ====== ====== ====== ====
</TABLE>
The changes in results of operations with respect to revenues, interest and
depreciation for the years ended December 31, 1999, 1998 and 1997 are primarily
attributable to the operations of the real property investments acquired and
related mortgage debt assumed and obtained, as described above. Included in
total revenues are interest and other revenues, which had increased $156,000 in
1999 and decreased $57,000 in 1998. The increase in interest and other income in
1999 resulted from interest earned from escrow accounts, restricted for
investment in future acquisitions. The decrease in interest and other revenues
in 1998, resulted from lower cash balances maintained.
General and administrative expenses decreased in 1999 and increased in 1998
due to transactional expenses incurred in 1998 relating to the proposed
partnership roll-up.
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, 1999, the Partnership's variable rate
indebtedness represented 45% of total long-term indebtedness. During 1999, this
variable rate indebtedness had a weighted average interest rate of 8.39%. Had
the weighted average interest rate been 100 basis points higher, the
Partnership's net income would have been approximately $242,000 less.
10
<PAGE> 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report................................ 12
Consolidated Balance Sheets at December 31, 1999 and 1998... 13
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... 14
Consolidated Statements of Changes in Partners' Capital
(Deficit) for the years ended December 31, 1999, 1998 and
1997...................................................... 15
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 16
Notes to Consolidated Financial Statements.................. 17-23
Consolidated Financial Statement Schedule
Real Estate and Accumulated Depreciation Schedule III....... 24-25
</TABLE>
11
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
The Partners
Net 2 L.P.:
We have audited the consolidated financial statements of Net 2 L.P. and
consolidated subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the consolidated financial
statement schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Net 2 L.P.
and consolidated subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
New York, New York
March 20, 2000
12
<PAGE> 13
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT UNITS AND PER
UNIT AMOUNTS)
<S> <C> <C>
ASSETS
Real estate, at cost:
Buildings................................................. $69,761 $55,963
Land...................................................... 12,164 11,713
------- -------
81,925 67,676
Less: accumulated depreciation............................ 5,968 6,164
------- -------
75,957 61,512
Properties held for sale.................................... -- 4,650
Cash and cash equivalents................................... 566 518
Restricted cash............................................. 12,508 9,861
Deferred expenses, net of accumulated amortization of $184
and $634 in 1999 and 1998, respectively................... 305 429
Rent receivable............................................. 957 1,667
Other assets................................................ 140 281
------- -------
$90,433 $78,918
======= =======
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgage notes payable...................................... $51,927 $41,519
Accrued interest payable.................................... 225 216
Accounts payable and accrued liabilities.................... 301 179
------- -------
52,453 41,914
------- -------
Partners' capital (deficit):
General Partner........................................... (254) (274)
Limited Partners ($100 per Unit, 500,000 Units authorized,
477,167 Units issued and outstanding).................. 38,234 37,278
------- -------
Total partners' capital................................... 37,980 37,004
------- -------
$90,433 $78,918
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
-------------- ---------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
Revenues:
Rental.................................... $ 10,086 $ 6,871 $ 5,934
Interest and other........................ 248 92 149
-------------- ---------------- --------------
10,334 6,963 6,083
-------------- ---------------- --------------
Expenses:
Interest.................................. 4,696 2,277 1,875
Depreciation.............................. 2,049 1,238 1,074
Amortization of deferred expenses......... 187 154 136
General and administrative................ 775 818 634
-------------- ---------------- --------------
7,707 4,487 3,719
-------------- ---------------- --------------
Income before net gain from sale of
properties................................ 2,627 2,476 2,364
Net gain from sale of properties.......... 784 4,516 --
-------------- ---------------- --------------
Net income.................................. $ 3,411 $ 6,992 $ 2,364
============== ================ ==============
Net income per Unit of limited partnership
interest (*).............................. $6.24 to $7.53 $12.62 to $15.55 $4.20 to $5.30
============== ================ ==============
</TABLE>
- ---------------
(*) Amounts allocated to unit holders vary depending on the dates they became
unit holders.
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNER PARTNERS
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
Net income.................................................. 3,411 69 3,342
Cash distributions.......................................... (2,435) (49) (2,386)
------- ----- -------
Partners' capital (deficit) at December 31, 1999............ $37,980 $(254) $38,234
======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,411 $ 6,992 $ 2,364
-------- -------- -------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,236 1,392 1,210
Increase in rents receivable........................... (498) (223) (238)
Net gain on sale of properties......................... (784) (4,516) --
Decrease (increase) in other assets.................... 142 (140) (111)
Increase in accrued interest payable................... 9 81 35
Increase (decrease) in accounts payable and other
liabilities.......................................... 122 (134) 110
-------- -------- -------
Total adjustments...................................... 1,227 (3,540) 1,006
-------- -------- -------
Net cash provided by operating activities.............. 4,638 3,452 3,370
-------- -------- -------
Cash flows from investing activities:
Proceeds from sale of properties.......................... 17,593 11,802 --
(Increase) decrease in restricted cash.................... (2,648) (9,861) 100
Investments in real estate................................ (36,383) (23,828) (2,419)
-------- -------- -------
Net cash used in investing activities.................. (21,438) (21,887) (2,319)
-------- -------- -------
Cash flows from financing activities:
Proceeds of mortgage notes payable........................ 21,207 34,363 --
Principal payments on mortgage notes...................... (1,746) (14,950) (560)
Increase in deferred expenses............................. (178) (206) --
Cash distributions to partners............................ (2,435) (2,435) (2,435)
-------- -------- -------
Net cash provided by (used in) financing activities.... 16,848 16,772 (2,995)
-------- -------- -------
Change in cash and cash equivalents......................... 48 (1,663) (1,944)
Cash and cash equivalents at beginning of year.............. 518 2,181 4,125
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 566 $ 518 $ 2,181
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 4,687 $ 2,196 $ 1,840
======== ======== =======
</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.
In December 1999, the sale of the Bristol and the Southborough Properties
resulted in an assumption of mortgage indebtedness of approximately $9.1
million.
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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. The Partnership terminates on
December 31, 2028.
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, 1999, there were 1,983 investors holding 477,167 limited
partnership units.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared on the accrual basis.
The financial statements reflect the accounts of the Partnership, Net 2
Canton LLC and Net 2 Ocala LLC, on a consolidated basis. The Partnership owns
100% interest in each of Net 2 Canton LLC and Net 2 Ocala LLC.
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.
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.
17
<PAGE> 18
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The leases relating to the properties are operating leases in accordance
with generally accepted accounting principles. Rental revenue is recognized on a
straight-line basis over the minimum lease terms. At December 31, 1999 and 1998,
rent receivable consists of the excess of rental revenues on a straight-line
basis over the rents collectible under the lease.
Percentage rent is recognized on a cash basis. The percentage rents
received for the years ended December 31, 1999, 1998 and 1997 were $170,000,
$100,000 and $0, respectively.
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, 1999, the restricted cash represents proceeds from the
sale of properties restricted for investment in future acquisitions.
No provision for income taxes has been made as the liability for such taxes
is that of the individual partners rather than of the Partnership.
Deferred expenses are comprised of loan fees, which are amortized using the
straight-line method over the term of the loans.
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, 1999 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 at a current transaction between willing
parties. The Partnership's cash, mortgage notes payable, accounts payable and
accrued liabilities are considered to be financial instruments and are carried
at cost, which approximates fair value.
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 consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
Certain amounts included in the prior years' financial statements have been
reclassified to conform with the current year's presentation.
18
<PAGE> 19
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 not 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. As of December 31, 1999, the
Partnership has not made any distributions of proceeds from capital
transactions.
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, 1999 totaled $27.057 million ($55.46 to $57.40
per Unit, per close). On January 31, 2000, the cumulative preferred return that
was unpaid at December 31, 1999 was reduced by a cash distribution to the
Limited Partners for the quarter ended December 31, 1999 totaling $596,459
($1.25 per unit). The General Partner received a cash distribution of $12,173 on
January 31, 2000.
Cash distributions paid per Unit of limited partnership interest for each
of the years in the three-year period ended December 31, 1999 was $5.00.
Taxable income as defined, before depreciation, generally is allocated in
the same proportion as cumulative distributions of distributable cash or
cumulative distributions of distributable cash 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 distributions of distributable cash from
capital transactions.
19
<PAGE> 20
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN REAL ESTATE
Following is a detailed schedule of the Partnership's real estate and lease
terms at December 31, 1999:
<TABLE>
<CAPTION>
LEASE(S) NET
ACQUISITION ANNUALIZED EXPIRATION RENTABLE
DATE OF COST BASE RENT DATE SQUARE
ACQUISITION TENANT LOCATION ($000'S) ($000'S) (MONTH/YEAR) FEET
- ----------- ------ -------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
2/28/89 Tranzonic Companies........... Highland Heights, OH $ 5,821 $ 702 3/09 94,657
2/28/89 Tranzonic Companies........... Tempe, AZ 1,548 186 3/09 49,951
3/5/90 Everest & Jennings............ Earth City, MO 4,377 323 8/02 147,000
9/14/90 Ameritech Services Inc. ...... Columbus, OH 2,450 245 8/05 20,000
9/28/90 RCS of Tucson................. Tucson, AZ 1,681 357 9/10 28,591
6/22/94 Kohl's Dept. Stores........... Eau Claire, WI 4,187 435 1/15 76,164
12/23/94 A-Copy, Inc. ................. Milford, CT 2,949 315 12/04 27,360
6/5/97 Wal-Mart Stores, Inc. ........ Westland, MI 7,904 753 1/09 102,826
7/24/98 Best Buy Inc. ................ Canton, OH 5,301 465 2/18 46,350
7/24/98 Best Buy Inc. ................ Spartanburg, SC 4,518 395 2/18 45,800
9/29/98 Hollywood Video Stores, 122,853
Inc. ......................... Wilsonville, OR 14,009 1,345 11/08
1/8/99 Associated Grocers of 696,597
Florida....................... Ocala, FL 20,071 1,872 12/18
6/29/99 Wal-Mart Stores, Inc. ........ Jacksonville, AL 2,211 146 1/09 56,132
8/4/99 Stone Container Corp. ........ Columbia, SC 4,898 465 8/12 185,960
------- ------ ---------
$81,925 $8,004 1,700,241
======= ====== =========
</TABLE>
In January 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.
In March 1999, the Partnership purchased a property located in Bristol,
Pennsylvania for approximately $9.2 million. The Partnership obtained
approximately $6.58 million in mortgage debt secured by the property.
In September 1999, the Partnership sold the remaining NCS property for net
proceeds of approximately $369,000, which resulted in a gain of approximately
$60,000.
In December 1999, the Partnership sold twelve properties located in
Michigan for approximately $7.7 million. The sale resulted in a loss of
approximately $261,000.
In December 1999, the Partnership sold the property located in Bristol,
Pennsylvania and one in Southborough, Massachusetts for approximately $13.2
million. The Bristol, Pennsylvania and the Southborough, Massachusetts
Properties were sold to Lexington, whose chairman and Co-Chief Executive Officer
is an officer and a shareholder of the General Partner. The sale resulted in a
gain of approximately $276,000.
20
<PAGE> 21
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma operating information for the years ended
December 31, 1999 and 1998, were prepared as if all acquisitions and
dispositions were consummated as of January 1, 1998. The information provided do
not purport to be indicative of what the operating results of the Partnership
would have been had the acquisitions and dispositions 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, 1999 DECEMBER 31, 1998
------------------- -------------------
<S> <C> <C>
Revenues....................................... $ 9,110 $ 8,681
Net income..................................... $ 2,094 $ 1,470
Income per Unit of limited partnership
interest..................................... $3.83 to $4.63 $2.65 to $3.27
============== ==============
</TABLE>
5. MORTGAGE NOTES PAYABLE
Following is a detailed schedule of the Partnership's mortgage notes
payable as of December 31, 1999 and 1998 ($000's):
<TABLE>
<CAPTION>
MORTGAGE NOTES
PAYABLE
AS OF DECEMBER 31, SCHEDULED
LOAN OR ------------------ INTEREST BALLOON DEBT SERVICE
PROPERTY LOCATION 1999 1998 RATE MATURITY PAYMENT IN 2000
- ----------------- ------- ------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nations Credit.............. $23,593 $24,440 Variable 5/00 $23,382 Variable
Eau Claire, WI.............. 2,683 2,777 8.00% 7/14 -- $ 313
Southborough, MA............ -- 2,610 7.50% 9/15 -- --
Westland, MI................ 4,740 5,055 7.50% 9/09 -- 683
Canton, OH.................. 3,574 3,626 7.15% 8/23 -- 313
Spartanburg, SC............. 2,968 3,011 7.15% 8/23 -- 260
Ocala, FL................... 14,369 -- 7.25% 2/09 10,700 1,332
------- ------- ------- --------
$51,927 $41,519 $34,082 $ 2,901
======= ======= ======= ========
</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, 1999, the outstanding balance of the line of
credit was $23.59 million with an interest rate of 9.63%. The line of credit
matures on May 1, 2000. The Partnership is currently exploring opportunities to
either extend or refinance this agreement.
The line of credit is secured by mortgages on ten of the fourteen
properties and by a negative declaration by the Partnership that the properties
owned would not be mortgaged to secure any other indebtedness. If the 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.
21
<PAGE> 22
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
2000........................................................ $24,435
2001........................................................ 908
2002........................................................ 978
2003........................................................ 1,053
2004........................................................ 1,133
</TABLE>
6. LEASES
Minimum future rental payments receivable under noncancelable operating
leases for the properties as of December 31, 1999, are as follows ($000's):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNTS
- ----------------------- --------
<S> <C>
2000........................................................ $ 8,051
2001........................................................ 8,081
2002........................................................ 8,074
2003........................................................ 7,893
2004........................................................ 8,142
Thereafter.................................................. 68,630
--------
Total....................................................... $108,871
========
</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 1999 1998 1997
- -------- ---- ---- ----
<S> <C> <C> <C>
Ocala, FL................................................... 21% -- --
Wilsonville, OR............................................. 15% -- --
Westland, MI................................................ 9% 12% --
Tranzonic(*)................................................ 9% 12% 14%
Total Petroleum(**)......................................... 8% 12% 14%
NCS(***).................................................... -- 10% 11%
Art Institute of Seattle(****).............................. -- -- 19%
</TABLE>
- ---------------
(*) These properties consist of two office/warehouse facilities, one in Ohio
and one in Arizona.
(**) These properties consist of thirteen retail stores and were sold on
December 28, 1999.
(***) These properties consist of fourteen retail stores and were sold on
January 25, 1999.
(****) This property was sold on September 29, 1998.
22
<PAGE> 23
NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES
The General Partner has granted Lexington, whose chairman and Co-Chief
Executive Officer is an officer and a shareholder of the General Partner, an
option exercisable at any time, to acquire the general partnership interest.
Lexington provides the Partnership with various administrative services. Under
the terms of the option, Lexington 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 Lexington retaining the option of paying such fair
market value in securities of Lexington, 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, 1999, 1998 and 1997, management
fees which are included in general and administrative expenses totaled $96,000,
$66,000 and $57,000, respectively.
Affiliates of the General Partner received acquisition fees totaling
$337,000, $348,400 and $70,500 for the years ended December 31, 1999, 1998 and
1997, respectively.
Lexington is reimbursed by the Partnership for various administrative
services performed. For the years ended December 31, 1999, 1998 and 1997, such
reimbursements totaled $309,000, $240,000 and $170,000, respectively.
8. SUBSEQUENT EVENTS
On March 20, 2000, the Partnership purchased a property located in Hampton,
Virginia for approximately $12.3 million. The Partnership obtained approximately
$7.5 million in mortgage financing secured by the property. The note bears
interest at a rate of 8.27% per annum and matures on April 1, 2010. The Hampton,
Virginia property consists of approximately 100,632 square foot office building
net leased to Nextel Communications of Mid-Atlantic, Inc. The lease has a term
of 10 years with four renewal options of five years each and expires on December
31, 2009. The current base rent is approximately $1.18 million, which increases
2% per annum.
23
<PAGE> 24
SCHEDULE III
NET 2 L. P. AND CONSOLIDATED SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999, 1998, AND 1997
INITIAL COST TO PARTNERSHIP AND GROSS AMOUNT AT WHICH CARRIED AT END OF
PERIOD(A)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
DESCRIPTION ENCUMBRANCES LAND BUILDINGS TOTAL(C) DEPRECIATION(D)
- ----------- ------------ ------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Office/Industrial................. $ 3,026(B) $ 578 $ 5,243 $ 5,821 $1,426
Office/Industrial................. 804(B) 154 1,394 1,548 379
Industrial, Earth City,
Missouri........................ 2,275(B) 652 3,725 4,377 1,097
Industrial, Columbus, Ohio........ 1,274(B) 506 1,944 2,450 452
Office, Tucson, Arizona........... 874(B) 402 1,279 1,681 297
Retail, Eau Claire, WI............ 2,683 815 3,372 4,187 466
Office, Milford, CT............... 1,533(B) 630 2,319 2,949 291
Retail, Westland, Michigan........ 4,740 2,000 5,904 7,904 375
Retail, Canton, Ohio.............. 3,574 1,200 4,101 5,301 147
Retail, Spartanburg, SC........... 2,969 1,050 3,468 4,518 125
Office, Wilsonville, Oregon....... 7,281(B) 1,100 12,909 14,009 405
Office, Ocala, Florida............ 17,199(B) 2,058 18,013 20,071 442
Retail, Jacksonville, Alabama..... 1,149(B) 286 1,925 2,211 24
Office, Columbia, South
Carolina........................ 2,546(B) 733 4,165 4,898 42
------- ------- ------- ------- ------
$51,927 $12,164 $69,761 $81,925 $5,968
======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
LIFE ON WHICH DEPRECIATION
DATE DATE ON LATEST INCOME STATEMENTS
ACQUIRED CONSTRUCTED ARE COMPUTED
------------------ ----------- ---------------------------
<S> <C> <C> <C>
Office/Industrial............... February 28, 1989 1968 40 years
Office/Industrial............... February 28, 1989 1981 40 years
Industrial, Earth City,
Missouri...................... March 5, 1990 1985 40 years
Industrial, Columbus, Ohio...... September 14, 1990 1989 40 years
Office, Tucson, Arizona......... September 28, 1990 1988 40 years
Retail, Eau Claire, WI.......... June 22, 1994 1993 & 1994 40 years
Office, Milford, CT............. December 23, 1994 1994 40 years
Retail, Westland, Michigan...... June 5, 1997 1987 40 years
Retail, Canton, Ohio............ July 24, 1998 1995 40 years
Retail, Spartanburg, SC......... July 24, 1998 1996 40 years
Office, Wilsonville, Oregon..... September 29, 1998 1980 40 years
Office, Ocala, FL............... January 8, 1999 1976 40 years
Retail, Jacksonville, AL........ June 29, 1999 1982 40 years
Office, Columbia, SC............ August 4, 1999 1968 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, 1999 for Federal income tax purposes was
approximately $71.3 million.
(B) The mortgage note is allocated based on the cost of the real estate.
24
<PAGE> 25
(C) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year................. $ 67,676 $56,882 $49,610
Additions during year........................ 36,383 23,828 7,904
Properties held for sale..................... -- (4,551) (632)
Sale of properties........................... (22,134) (8,483) --
Write-off of fully depreciated property...... -- -- --
-------- ------- -------
Balance at end of year....................... $ 81,925 $67,676 $56,882
======== ======= =======
</TABLE>
(D) Reconciliation of accumulated depreciation:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Balance at beginning of year................... $ 6,164 $ 7,160 $6,192
Properties held for sale....................... -- (427) --
Sale of properties............................. (2,245) (1,807) (106)
Depreciation expense........................... 2,049 1,238 1,074
------- ------- ------
Balance at end of year......................... $ 5,968 $ 6,164 $7,160
======= ======= ======
</TABLE>
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 Corporate Properties Trust
("Lexington"), whose chairman and Co-Chief Executive Officer is an officer and a
shareholder of the General Partner, an option exercisable at any time, to
acquire the general partnership interest. Under the terms of the option,
Lexington, 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
Lexington retaining the option of paying such fair market value in securities of
Lexington, limited partnership units in controlled subsidiaries, cash or a
combination thereof. Lexington provides the Partnership with various
administrative services.
The directors and executive officers of Lepercq Net 2 Inc. are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
E. Robert Roskind........................ President and Secretary
Robert N. Albert......................... Vice President and Treasurer
Denise E. DeBaun......................... Vice President
Dianne R. Smith.......................... Vice President and Assistant Secretary
</TABLE>
Certain biographical information relating to the directors and executive
officers of Lepercq Net 2 Inc. is set forth below:
E. Robert Roskind, age 55, has been associated with LCP since 1973 and has
been Chairman of The LCP Group ("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 Krupp Government Income Trust I and Krupp Government
Income Trust II.
Robert N. Albert, age 49, has been employed by LCP since 1997. Prior to
joining LCP, he owned a retail furniture and antiques business for twenty-five
years. He is a graduate of the University of Louisville, where he received his
bachelor's degree in Business Management.
Denise E. DeBaun, age 49, was associated with LCP from 1981 to 1997. She
was a member of the marketing department from 1986 to 1990. Since 1997, she has
served as an Executive 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.
Dianne R. Smith, age 53, has been associated with LCP since 1988 as its
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.
27
<PAGE> 28
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 1999.
The directors and executive officers of Lepercq Net 2 Inc. received no
remuneration from the Partnership.
As described in Item 13 below, the General Partner and its affiliates were
paid certain fees and commissions and reimbursed for certain expenses.
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, 1999.
(c) Lexington Corporate Properties Trust, whose chairman and Co-Chief
Executive Officer is an officer and a shareholder of the General
Partner, owns 4,593 units as of December 31, 1999.
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, 1999, 1998 and 1997, management
fees which are included in general and administrative expenses totaled $96,000,
$66,000 and $57,000, in 1999, 1998 and 1997, respectively.
Affiliates of the General Partner received acquisition fees totaling
$337,000, $348,400 and $70,500 for the years ended December 31, 1999, 1998 and
1997, respectively.
Lexington is reimbursed by the Partnership for various administrative
services performed. For the years ended December 31, 1999, 1998 and 1997, such
reimbursements totaled $309,000, $240,000 and $170,000, 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.
28
<PAGE> 29
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.
(21) Subsidiaries of the Registrant.
Net 2 Canton L.L.C., a Delaware limited liability company,
qualified to do business in Ohio and South Carolina.
Net 2 Ocala L.L.C., a Florida limited liability company,
qualified to do business in Florida.
(b) Reports on Form 8-K filed in the fourth quarter of 1999.
None
(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.
29
<PAGE> 30
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
<TABLE>
<S> <C>
By: /s/ E. ROBERT ROSKIND By: /s/ BRENDA LUBRIN
------------------------------------------------- -------------------------------------------------
President Assistant Accounting Officer
</TABLE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ E. ROBERT ROSKIND President and Secretary
- -----------------------------------------------------
E. Robert Roskind
/s/ ROBERT N. ALBERT Vice President and Treasurer
- -----------------------------------------------------
Robert N. Albert
/s/ DENISE E. DEBAUN Vice President
- -----------------------------------------------------
Denise E. DeBaun
/s/ DIANNE R. SMITH Vice President and Assistant Secretary
- -----------------------------------------------------
Dianne R. Smith
</TABLE>
Date:
- -----------------------------------------------
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1999, AS CONTAINED IN THE PARTNERSHIP'S FORM 10-K
FOR SUCH YEAR AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K,
DOLLARS ARE IN THOUSANDS, EXCEPT UNITS AND PER UNIT AMOUNTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 13,074
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 81,925
<DEPRECIATION> (5,968)
<TOTAL-ASSETS> 90,433
<CURRENT-LIABILITIES> 0
<BONDS> 51,927
0
0
<COMMON> 0
<OTHER-SE> 37,980
<TOTAL-LIABILITY-AND-EQUITY> 90,433
<SALES> 0
<TOTAL-REVENUES> 10,334
<CGS> 0
<TOTAL-COSTS> 2,049
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,696
<INCOME-PRETAX> 2,627
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,627
<DISCONTINUED> 784
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,411
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
