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 which are 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., which was purchased on June 23, 2000, by a subsidiary of Lexington Corporate Properties Trust ("Lexington"), whose chairman and Co-Chief Executive Officer is an officer and a shareholder of the General Partner, 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. The Prospectus was filed with the Securities and Exchange Commission as part of the Partnership's Registration Statement on Form S-11 (No.33-25984). 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.
Each of the following tenants/guarantors accounted for 10% or more of consolidated rental revenues for the years ended December 31:
(*) Consist of two retail stores, one in Michigan and one in Alabama. (**) Consist of two office/warehouse facilities, one in Ohio and one in Arizona. (***) Consisted of thirteen retail stores and were sold on December 28, 1999. (****) Consisted of fourteen retail stores and were sold on January 25, 1999.
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 short and long-term liquidity requirements. Liquidity could be adversely affected by unanticipated costs, lessees 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 located throughout the United States.
The General Partner has granted Lexington, an option exercisable at any time, to acquire the general partnership interest. Under the terms of the option, Lexington, subject to the approval of any such transaction by the independent members of its Board of Trustees, may acquire the general partnership interest at its fair market value based upon a formula relating to partnership cash flows, with 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.
On November 13, 2000, the Partnership entered into an Agreement and Plan of Merger ("Agreement") with Lexington. The Agreement has been adopted and approved by the General Partner and Lexington's Board of Trustees. As currently proposed, Lexington would issue $35.5 million in securities (and assume existing mortgage debt) to acquire the Partnership, no less than 50% of the consideration would be in 8.5% convertible subordinated debentures due 2009 and 50% in Lexington common shares at a price not less than $11.00 per share and no greater than $13.00 per share. Limited Partners would have the option of selecting greater than 50% of their consideration in the convertible subordinated debentures. The convertible subordinated debentures would be convertible after four years into Lexington common shares, at a price of $14.00 per share and redeemable by Lexington with cash or common shares after five years, if the common shares of Lexington exceed $14.00 per share. The transaction is subject to customary closing conditions, including approval by Lexington's shareholders and the Partnership's limited.
Competition
The Partnership has been in the net lease business since 1988, and has established close relationships with a large number of major corporate tenants and maintains a broad network of contacts including developers, brokers and lenders. Notwithstanding these relationships, there are numerous commercial developers, real estate companies, financial institutions and other investors with greater financial resources, that compete with the Partnership in seeking properties for acquisition and tenants who will lease space in these properties. The Partnership's competitors include other partnerships, pension funds, private companies, REITs and individuals.
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 or results of 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."
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2000, the Partnership owned or had interests in 1.9 million square feet of rental space in 16, office, industrial and retail properties. The Partnership's Properties are currently 100% leased except for one property located in Earth City, Missouri which is under contract for sale as of January 10, 2001. The number, percentage of annualized rental revenues and percentage of square footage of the Partnership's portfolio follows:
The following is a detailed schedule of the Partnership's real property portfolio as of December 31, 2000:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5.
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, 2000, there were 1,912 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, 2000 was $5.00.
ITEM 6.
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):
(*) 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.
ITEM 7.
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 short and long-term liquidity requirements. Liquidity could be adversely affected by unanticipated costs, lessees 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, 2000 totaled $29.92 million ($61.46 to $63.40 per Unit, per close), and was reduced by $596,000 ($1.25 per Unit) with the fourth quarter 2000 distribution paid on January 30, 2001.
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, 2000, the Partnership entered into the following real estate transactions:
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 $677,000 and a balloon payment of $6.8 million at maturity.
The Plymouth property was purchased from Lexington.
During 2000, the tenant of the Partnership's property in Earth City, Missouri, declared bankruptcy and rejected the lease. The Partnership expects to incur expenses such as real estate property taxes, insurance and property repairs and maintenance. On January 10, 2001, the Partnership entered into an agreement to sell this property for approximately $4 million. The closing is expected to take place in the second quarter of 2001.
On October 29, 1998, the Partnership received an increase and an extension on the line of credit of up to $24.5 million from Bank of America (formerly Nations Credit Commercial Corporation) bearing interest at a rate of 315 basis points over the London Interbank Offered Rate ("LIBOR"). The line of credit matured on May 1, 2000. 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 LIBOR. The loan requires interest only payments and matures on January 10, 2001. On December 29, 2000, the Partnership repaid $11 million on the principal balance through separate financing secured by the Michigan, South Carolina and one of the Arizona properties. The remaining balance of the note is secured by the remaining six properties located in Alabama (1), Arizona (1), Connecticut (1), Ohio (2) and Oregon (1). The loan was extended to January 10, 2002. The Partnership is currently exploring opportunities to refinance this agreement.
Net cash used in investing activities totaled $7.865 million in 2000, $21.438 million in 1999 and $21.887 million in 1998. Cash used in investing activities related primarily to investments in real estate properties, net of proceeds from sale of properties.
Net cash provided by financing activities totaled $4.147 million in 2000, $16.848 million in 1999 and $16.772 million in 1998. Cash provided by financing activities related primarily to proceeds received from mortgage financing.
On November 13, 2000, the Partnership entered into an Agreement with Lexington. The Agreement has been adopted and approved by the General Partner and Lexington's Board of Trustees. As currently proposed, Lexington would issue $35.5 million in securities (and assume existing mortgage debt) to acquire the Partnership, no less than 50% of the consideration would be in 8.5% convertible subordinated debentures due 2009 and 50% in Lexington common shares at a price not less than $11.00 per share and no greater than $13.00 per share. Limited Partners would have the option of selecting greater than 50% of their consideration in the convertible subordinated debentures. The convertible subordinated debentures would be convertible after four years into Lexington common shares, at a price of $14.00 per share and redeemable by Lexington with cash or common shares after five years, if the common shares of Lexington exceed $14.00 per share. The transaction is subject to customary closing conditions, including approval by Lexington's shareholders and the Partnership's limited partners.
Results of Operations (in thousands)
The changes in results of operations with respect to revenues, interest and depreciation for the years ended December 31, 2000, 1999 and 1998 are primarily attributable to the operations of the real property investments acquired and sold, and related mortgages assumed and obtained, as described above.
Rental revenue did not materially change in 2000. Rental revenue increased $3,200 in 1999, primarily due to real property investment acquired in the first quarter of 1999. Included in total revenues are interest and other revenues, which increased $293 and $156 in 2000 and 1999, respectively, from interest earned from escrow accounts and cash invested.
General and administrative expenses increased in 2000 due to costs incurred regarding a vacated property located in Earth City, Missouri. General and administrative expenses did not materially change in from 1998 to 1999.
In 2000, the transaction expenses relate to the proposed acquisition of the Partnership by Lexington as described above. In 1998, the Partnership incurred transaction expenses due to the proposed merger into a subsidiary of Lexington that was abandoned.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 (Accounting for Derivative Instruments and Hedging Activities) which establishes accounting and reporting standards for derivative instruments. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Partnership does not expect the adoption of SFAS on 133 January 1, 2001 to have any impact on its financial position or results of operations since it has no derivatives.
ITEM 7A.
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, 2000 and 1999, the Partnership's variable rate indebtedness represented 22% and 45% of total long-term indebtedness. During 2000 and 1999, this variable rate indebtedness had weighted average interest rates of 9.26% and 8.39%, respectively. Had the weighted average interest rates been 100 basis points higher, the Partnership's net income would have been approximately $234,000 and $242,000 less for the years ended December 31, 2000 and 1999, respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NET 2 L.P. AND SUBSIDIARIES
INDEX
INDEPENDENT AUDITORS' REPORT
The Partners Net 2 L.P.:
We have audited the consolidated financial statements of Net 2 L.P. and 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 auditing standards generally accepted in the United States of America. 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 subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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.
New York, New York March 9, 2001
NET 2 L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) DECEMBER 31,
See accompanying notes to consolidated financial statements.
NET 2 L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) YEARS ENDED DECEMBER 31,
(*) Amounts allocated to unit holders vary depending on the dates they became unit holders.
See accompanying notes to consolidated financial statements.
NET 2 L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See accompanying notes to consolidated financial statements.
NET 2 L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
See accompanying notes to consolidated financial statements.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
DECEMBER 31, 2000, 1999 AND 1998
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 triple 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 (477,417 Units) from 2,396 investors and the offering was terminated. The Partnership returned a capital contribution of $25 (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, 2000, there were 1,912 investors holding 477,167 limited partnership units.
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 the approval of any such transaction by the independent members of its Board of Trustees, may acquire the general partnership interest at its fair market value based upon a formula relating to partnership cash flows, with 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.
On November 13, 2000, the Partnership entered into an Agreement and Plan of Merger ("Agreement") with Lexington. The Agreement has been adopted and approved by the General Partner and Lexington's Board of Trustees. As currently proposed, Lexington would issue $35,500 in securities (and assume existing mortgage debt) to acquire the Partnership, no less than 50% of the consideration would be in 8.5% convertible subordinated debentures due 2009 and 50% in Lexington common shares at a price not less than $11.00 per share and no greater than $13.00 per share. Limited Partners would have the option of selecting greater than 50% of their consideration in the convertible subordinated debentures. The convertible subordinated debentures would be convertible after four years into Lexington common shares, at a price of $14.00 per share and redeemable by Lexington with cash or common shares after five years, if the common shares of Lexington exceed $14.00 per share. The transaction is subject to customary closing conditions, including approval by Lexington's shareholders and the Partnership's limited.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared on the accrual basis.
The accompanying consolidated financial statements include the accounts of the Partnership and its majority-owned subsidiary partnerships and corporations, after elimination of all material intercompany accounts, transactions and profits.
Real estate assets are stated at cost, less accumulated depreciation. If there is an event or change in circumstance that indicates an impairment in the value of a property has occurred, the Partnership's policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of each such property over its remaining useful life, on an undiscounted basis, to the carrying amount of the property. If such carrying amounts are in excess of the estimated projected operating cash flows of the property, the Partnership would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. No such impairment loss has occurred. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
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.
In connection with the acquisition of properties, the Partnership capitalizes third party direct costs only. No internal costs (e.g. rent, salaries) are capitalized. Costs incurred for transactions that terminate are immediately expensed.
The leases relating to the properties are operating leases. Rental revenue is recognized on a straight-line basis over the minimum lease terms. Rent receivable consists of the excess of rental revenues recognized 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 each of the years in the three-year period ended December 31, 2000 were $307, $170 and $100, respectively.
Deferred expenses are costs in obtaining financing and are amortized using the straight-line method over the term of the loans.
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.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. CONTINUED
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 period ended December 31, 2000 was 477,167.
The Partnership considers all highly liquid instruments with maturity of three months or less from the date of purchase to be cash equivalents.
The Financial Accounting Standards Board's ("FASB") 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, their costs approximate fair value.
The FASB issued Statement Standard No. 133 (Accounting for Derivative Instruments and Hedging Activities) which establishes accounting and reporting standards for derivative instruments. SFAS 133 requires that an entity recognizes all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Partnership does not expect the adoption of SFAS 133 on January 1, 2001 to have any impact on its financial position or results of operations since it has no derivatives.
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 year's financial statements have been reclassified to conform to the current year's presentation.
3. THE PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, the General Partner is liable for all general obligations of the Partnership to the extent not paid by the Partnership. The Limited Partners are not and will not be liable for the debts of the Partnership beyond their contributed capital.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
3. CONTINUED
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 of distributable cash 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 of distributable cash from capital transactions equal to an 11% cumulative non-compounded preferred return plus a return of capital contribution. Thereafter, such distributions are to be made 85% to the Limited Partners and 15% to the General Partner. As of December 31, 2000, the Partnership has not made any distributions of proceeds from capital transactions.
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, 2000 totaled $29,920 ($61.46 to $63.40 per Unit, per close). On January 30, 2001, the unpaid cumulative preferred return at December 31, 2000 was reduced by a cash distribution to the Limited Partners for the quarter ended December 31, 2000 totaling $596 ($1.25 per unit). The General Partner received a cash distribution of $12 on January 30, 2001.
Cash distributions paid per Unit of limited partnership interest for each of the years in the three-year period ended December 31, 2000 was $5.00.
Taxable income as defined, before depreciation, generally is allocated in the same proportion as distributions of distributable cash or 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 statement 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.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
4. INVESTMENTS IN REAL ESTATE
Following is a detailed schedule of the Partnership's real estate and lease terms at December 31, 2000:
In 2000, the Columbia and Plymouth properties were purchased from Lexington.
In 1999, the Partnership purchased a property located in Bristol, Pennsylvania for $9,200. The Partnership obtained $6,580 in mortgage financing secured by the property. It was subsequently sold the same year.
In 1999, the Partnership sold properties in Texas, Pennsylvania, Massachusetts and Michigan for $26,646, which resulted in a net gain of $784. The Jacksonville property was purchased from, and the Pennsylvania and Massachusetts properties were sold to, Lexington.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
4. CONTINUED
In 1998, the Partnership sold the Sandusky and Seattle properties for net proceeds of $11,800 and recognized a gain of $4,500.
The following unaudited pro forma operating information for the years ended December 31, 2000 and 1999, were prepared as if all acquisitions and dispositions were consummated as of January 1, 1999. 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 follow:
5. MORTGAGE NOTES PAYABLE
Following is a detailed schedule of the Partnership's mortgage notes payable as of December 31, 2000 and 1999:
On October 29, 1998, the Partnership received an increase and an extension on the line of credit of up to $24.5 million from Bank of America (formerly Nations Credit Commercial Corporation) bearing interest at a rate of 315 basis points over the London Interbank Offered Rate ("LIBOR"). The line of credit matured on May 1, 2000.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
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 LIBOR. The loan requires interest only payments and matures on January 10, 2001. On December 29, 2000, the Partnership repaid $11 million on the principal balance through separate financing obtained on the Michigan, South Carolina and one of the Arizona properties. The remaining balance of the note is secured by the remaining six 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 loan was extended up to January 10, 2002. The Partnership is currently exploring opportunities to refinance this agreement.
The mortgage notes are recourse to the Parthnership but not to its Limited or General Partners. They may be prepaid, subject to certain prepayment penalties, as defined.
Required principal payments of the mortgage notes payable for the succeeding five years are as follows:
6. LEASES
Minimum future rental payments receivable under noncancelable operating leases for the properties as of December 31, 2000 are as follows:
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.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
6. CONTINUED
Each of the following tenants/guarantors accounted for 10% or more of rental revenues for the years ended December 31,:
(*) Consist of two retail stores, one in Michigan and one in Alabama. (**) Consist of two office/warehouse facilities, one in Ohio and one in Arizona. (***) Consisted of thirteen retail stores and were sold on December 28, 1999. (****) Consisted of fourteen retail stores and were sold on January 25, 1999.
Summarized financial information for each tenants/guarantors which represented 10% or greater of rental revenue in 2000, follows:
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
6. CONTINUED
Associated Grocers of Florida, Inc., the Partnership's largest tenant based upon rental revenue, is a private organization which does not file financial statements with the Securities and Exchange Commission. The Partnership does receive annual audited financial statements from the tenant pursuant to the lease however, has no authority to disclose publicly such financial data. The tenant operates as a retailer-owned cooperative in the wholesale distribution of grocery products and uses the property as a distribution center. According to publicly published reports, the tenant is one of the top 50 (based on revenues) private companies in Florida and had in excess of 300 employees.
7. RELATED PARTIES
The General Partner has granted Lexington, an option exercisable at any time, to acquire the general partnership interest. Under the terms of the option, Lexington, subject to the approval of any such transaction by the independent members of its Board of Trustees, may acquire the general partnership interest at its fair market value based upon a formula relating to partnership cash flows, with 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.
On November 13, 2000, the Partnership entered into the Agreement with Lexington. The Agreement has been adopted and approved by the General Partner and Lexington's Board of Trustees. As currently proposed, Lexington would issue $35,500 in securities (and assume existing mortgage debt) to acquire the Partnership, no less than 50% of the consideration would be in 8.5% convertible subordinated debentures due 2009 and 50% in Lexington common shares at a price not less than $11.00 per share and no greater than $13.00 per share. Limited Partners would have the option of selecting greater than 50% of their consideration in the convertible subordinated debentures. The convertible subordinated debentures would be convertible after four years into Lexington common shares, at a price of $14.00 per share and redeemable by Lexington with cash or common shares after five years, if the common shares of Lexington exceed $14.00 per share. The transaction is subject to customary closing conditions, including approval by Lexington's shareholders and the Partnership's limited partners.
In 2000, the Columbia and the Plymouth properties were purchased from Lexington. In 1999, the Jacksonville property was purchased from, and the Pennsylvania and Massachusetts properties were added to Lexington.
Lexington is reimbursed by the Partnership for various administrative services performed. For the years ended December 31, 2000, 1999 and 1998, such reimbursements totaled $186, $309 and $240, respectively.
Leased Properties Management, Inc., which was purchased by a subsidiary of Lexington on June 23, 2000, 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, 2000, 1999 and 1998, management fees which are included in general and administrative expenses totaled $96, $96 and $66, respectively.
Affiliates of the General Partner received acquisition fees totaling $120, $337 and $348 for the years ended December 31, 200, 1999 and 1998, respectively.
NET 2 L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
8. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Cash paid for interest for each of the years in the three-year period ended December 31, 2000 were $4,929 $4,687 and $2,196, respectively.
In December 1999, the sale of the Bristol and the Southborough Properties resulted in an assumption by Lexington of mortgage indebtedness of $9,100.
9. UNAUDITED QUARTERLY FINANCIAL DATA
The sum of the quarterly net income per Unit may not equal the full year amounts because the amounts for the quarters and full year were computed independently for each period.
10. SUBSEQUENT EVENTS
On January 10, 2001, the Partnership entered into an agreement to sell a property located in Earth City, Missouri for approximately $4 million. The closing is expected to take place in the second quarter of 2001.
Schedule III NET 2 L. P. AND CONSOLIDATED SUBSIDIARIES Real Estate and Accumulated Depreciation December 31, 2000, 1999, and 1998 Initial cost to Partnership and gross amount at which carried at end of period (A) (In thousands)
Continued
Schedule III NET 2 L. P. AND CONSOLIDATED SUBSIDIARIES Real Estate and Accumulated Depreciation December 31, 2000, 1999, and 1998 Initial cost to Partnership and gross amount at which carried at end of period (A) (In thousands)
Continued
- -------------------------------------------------- (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, 2000 for Federal income tax purposes was approximately $96,279.
(B) The mortgage note is allocated based on the cost of the real estate.
(C) Reconciliation of real estate owned:
(D) Reconciliation of accumulated depreciation:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10.
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 directors and executive officers of Lepercq Net 2 Inc. are as follows:
Certain biographical information relating to the directors and executive officers of Lepercq Net 2 Inc. is set forth below:
E. Robert Roskind, age 56, has been associated with The LCP Group, L.P., a real estate advisory firm, since 1973 and has been Chairman of The LCP Group, L.P. since September 1976. He also serves as Chairman of the Board and Co-Chief Executive Officer of Lexington. 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 Clarion CMBS Value Fund, Inc.
Robert N. Albert, age 50, has been employed by The LCP Group, L.P. since 1997. He owned a retail furniture and antiques business for twenty-five years, prior to joining The LCP Group, L.P. He is a graduate of the University of Louisville, where he received his bachelor's degree in Business Management.
Denise E. DeBaun, age 50, was associated with The LCP Group, L.P. 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. Ms. DeBaun is a graduate of Hunter College of the City University of New York.
Dianne R. Smith, age 54, has been associated with The LCP Group, L.P. since 1988 as its paralegal. Ms. Smith also serves as the Paralegal to Lexington. Ms. Smith is a graduate of New York University where she received her Paralegal degree.
Lisette Almedina, age 32, has been associated with The LCP Group, L.P. since 1997 as its office manager. Ms. Almedina worked as an office manager in a retail furniture and antiques business for three years, prior to joining The LCP Group, L.P. Ms. Almedina is a graduate of Pace University.
ITEM 11.
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 2000.
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.
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, 2000.
(c) Lexington Corporate Properties Trust, whose chairman and Co-Chief Executive Officer is an officer and a shareholder of the General Partner, owns 5,693 units as of December 31, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The General Partner has granted Lexington, an option exercisable at any time, to acquire the general partnership interest. Under the terms of the option, Lexington, subject to the approval of any such transaction by the independent members of its Board of Trustees, may acquire the general partnership interest at its fair market value based upon a formula relating to partnership cash flows, with 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.
On November 13, 2000, the Partnership entered into an Agreement and Plan of Merger ("Agreement") with Lexington. The Agreement has been adopted and approved by the General Partner and Lexington's Board of Trustees. As currently proposed, Lexington would issue $35.5 million in securities (and assume existing mortgage debt) to acquire the Partnership, no less than 50% of the consideration would be in 8.5% convertible subordinated debentures due 2009 and 50% in Lexington common shares at a price not less than $11.00 per share and no greater than $13.00 per share. Limited Partners would have the option of selecting greater than 50% of their consideration in the convertible subordinated debentures. The convertible subordinated debentures would be convertible after four years into Lexington common shares, at a price of $14.00 per share and redeemable by Lexington with cash or common shares after five years, if the common shares of Lexington exceed $14.00 per share. The transaction is subject to customary closing conditions, including approval by Lexington's shareholders and the Partnership's limited partners.
The Partnership reimburses the General Partner or its affiliates for expenses incurred and may pay interest on loans made in connection with acquisitions.
In 2000, the Columbia and the Plymouth properties were purchased from Lexington. In 1999, the Jacksonville property was purchased from and the Pennsylvania and the Massachusetts properties were sold to, Lexington.
Lexington is reimbursed by the Partnership for various administrative services performed. For the years ended December 31, 2000, 1999 and 1998, such reimbursements totaled $186,000, $309,000 and $240,000, respectively.
Leased Properties Management, Inc., which was acquired by a subsidiary of Lexington on June 23, 2000, 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, 2000, 1999 and 1998, management fees which are included in general and administrative expenses totaled $96,000, $96,000 and $66,000, respectively.
Affiliates of the General Partner received acquisition fees totaling $120,000, $337,000 and $348,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
RWR Properties, Inc., an affiliate of an officer and a shareholder of the General Partner, received acquisition fees of $198,000, $352,000 and $211,000 for the years ended December 31, 2000, 1999 and 1998.
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.
PART IV.
ITEM 14.
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.
Net 2 Hamton L.L.C., a Delaware limited liability company, qualified to do business in Virginia.
Net 2 Plymouth L.L.C., a Delaware limited liability company, qualified to do business in Michigan
Net 2 Stone L.L.C., a Delaware limited liability company, qualified to do business in South Carolina.
Net 2 Cox L.L.C., a Delaware limited liability company, qualified to do business in Arizona.
(b) Reports on Form 8-K filed in the fourth quarter of 2000. 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.
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
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.
Date: April 2, 2001 --------------------------------------