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 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.
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,:
(a) These properties consist of two office/warehouse facilities in Ohio and Arizona. (b) These properties consist of thirteen retail stores at various locations in Michigan. (c) These properties consist of fourteen retail stores at various locations in Texas.
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 (the "Company"), whose chairman and Co-Chief Executive Officer is chairman of the General Partner, an option exercisable at any time, to acquire the general partnership interest. The Company provided the Partnership various administrative services. Under the terms of the option, the Company, 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 the Company retaining the option of paying such fair market value in securities of the Company, limited partnership units in controlled subsidiaries, cash or a combination thereof.
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.
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. The Partnership does incur costs relating to environmental investigation and re-mediation related to the Total Petroleum properties. If the cost exceeds $10,000 for any one property, the Partnership applies for reimbursements in excess of $10,000 to the Michigan Underground Storage Tank Financial Assurance Fund ("MUSTFA"). All claims are subject to approval by MUSTFA. These costs are not expected to have a material impact on the financial position or results of operations of the Partnership. The Partnership has received partial reimbursement of such costs. 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 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."
ITEM 2.
ITEM 2. PROPERTIES - -------------------
Following is a detailed schedule of the Partnership's real estate, including properties held for sale, and lease terms at December 31, 1998:
(*) As of December 31, 1998, thirteen of the fourteen properties are held for sale.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - --------------------------
Neither the Partnership nor its properties are subject to any pending legal proceedings.
ITEM 4.
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, 1998 to a vote of Unit holders.
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, 1998, there were 2,049 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, 1998 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 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.
On June 6, 1997, the Partnership acquired a property in Westland, Michigan. The Westland Property consists of a 102,826 square foot retail department store building leased to Wal-Mart Stores, Inc. pursuant to a triple net lease. The lease has a remaining term which expires on January 31, 2009. The purchase price of $7.050 million and related expenses of $81,000 were satisfied by a cash payment and by an assumption of an existing note with a principal balance of $4.712 million. The note bears interest at a stated rate of 10.5% per annum and the maturity date of the note is September 1, 2009. The purchase of the Westland Property has been recorded in the financial statements at the total of the cash paid plus the fair value of the mortgage liability assumed. The fair value of the mortgage was determined, using an imputed interest rate of 7.5%, to be $5.484 million.
During the year ended December 31, 1998, the Partnership acquired the following properties:
During the year, the Partnership sold the Sandusky and Seattle Properties for a net proceeds of $11.8 million and recognized a net gain of approximately $4.5 million.
On October 16, 1998, the Partnership entered into an agreement to acquire a property located in Ocala, Florida for approximately $19.5 million. The property consist of 696,597 square foot warehouse and distribution building, net leased to Associated Grocers of Florida, Inc. through December 31, 2018. The Partnership obtained financing on January 5, 1999. The acquisition closed on January 7, 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 Nations Credit Commercial Corporation bearing interest at a rate of 315 basis points over LIBOR. As of December 31, 1998, the outstanding balance on the line of credit was $24.44 million with an interest rate of 8.77%. The line of credit matures on May 1, 2000.
On November 5, 1998, the Partnership entered into an agreement to sell thirteen of the fourteen NCS Properties for approximately $5.425 million. As of December 31, 1998, the book value of the properties was approximately $4.65 million, including rent receivable of approximately $526,000. The sale closed on January 25, 1999.
As of December 31, 1998, the Partnership repaid $1.7 million of its short-term debt.
As of December 31, 1998, the restricted cash represents proceeds from the sale of a property restricted for investment in future acquisitions.
The unpaid cumulative preferred return at December 31, 1998 totaled $24.194 million ($49.46 to $51.40 per Unit, per close), and was reduced by $596,459 ($1.25 per Unit) with the fourth quarter 1998 distribution paid on January 29, 1999.
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.
Impact of Year 2000 - -------------------
The Year 2000 compliance issue concerns the inability of computer systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and organizations.
The General Partner has been taking the necessary steps to understand the nature and extent of the work required to make its core information computer systems and non-information embedded systems Year 2000 compliant. The General Partner has determined that it will not be necessary to significantly modify, update or replace its computer hardware and software applications.
The vendor that provides the General Partner's existing general ledger software has released a compliant version of its product which the General Partner is currently using. The cost of the general ledger system did not have a material effect on the Partnership's financial condition or results of operations. The Partnership's properties, which have no scheduled lease expirations prior to August 18, 2002, are subject to net leases and accordingly the Year 2000 compliance of embedded systems (e.g., security, HVAC, fire and elevator systems) are the responsibility of the tenants. The General Partner has contacted each of its tenants asking them to identify and evaluate the changes and modifications necessary to make these systems compliant for Year 2000 processing. The cost associated with the effect to make the embedded systems Year 2000 compliant are the tenant's responsibility. However, no assurances can be given that the properties embedded systems will be Year 2000 compliant by December 31, 1999 and compliance costs, if any, incurred by the Partnership would not be significant.
The General Partner is communicating with significant third-party service providers and vendors with which it does business to determine the efforts being made on their part for compliance. The General Partner is attempting to receive compliance certificates from all third parties that have a material impact on the Partnership's operations, but no assurance can be given with respect to the cost or timing of such efforts or the potential effects of any failure to comply.
Management will closely monitor the Partnership's entire Year 2000 compliance function and will develop contingent plans no later than the third quarter of 1999 if necessary.
Results of Operations ($000) - ----------------------------
The changes in results of operations with respect to revenues, interest and depreciation for the years ended December 31, 1998, 1997 and 1996 are primarily attributed to the operations of the real property investments acquired and related mortgage debt assumed in 1997 and 1998 as described above. Included in total revenues are interest and other revenues, which had decreased $57,000 and $322,000 in 1998 and 1997, respectively. The decreases resulted from lower cash balances maintained, decreases in MUSTFA reimbursements received and gain recognized from sale of the NCS stocks in 1996.
General and administrative expenses increased in 1998 and decreased in 1997 due to transactional expenses incurred in relation to the partnership roll-up.
The gain on sale of properties resulted from the sale of the Seattle Property of $4.527,000, net of $11,000 loss incurred from the sale of the Sandusky Property.
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, 1998, the Partnership's variable rate indebtedness represented 59% of total long-term indebtedness. During 1998, this variable rate indebtedness had a weighted average interest rate of 9.87%. Had the weighted average interest rate been 100 basis points higher, the Partnership's net income would have been approximately $135,000 less.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
NET 2 L.P.
INDEX
Page ----
Independent Auditors' Report 13
Balance Sheets at December 31, 1998 and 1997 14
Statements of Income for the years ended December 31, 1998, 1997 and 1996 15
Statements of Changes in Partners' Capital (Deficit) for the years ended December 31, 1998, 1997 and 1996 16
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 17
Notes to Financial Statements 18-24
Financial Statement Schedule - ----------------------------
Real Estate and Accumulated Depreciation Schedule III 25
Independent Auditors' Report ----------------------------
The Partners Net 2 L.P.:
We have audited the financial statements of Net 2 L.P. as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the 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 financial statements referred to above present fairly, in all material respects, the financial position of Net 2 L.P. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
New York, New York February 24, 1999
NET 2 L.P.
BALANCE SHEETS (In thousands, except units and per unit amounts)
December 31, 1998 and 1997
See accompanying notes to financial statements.
NET 2 L.P.
STATEMENTS OF INCOME (In thousands, except per unit amounts)
Years ended December 31, 1998, 1997 and 1996
(*) Amounts allocated to unit holders vary depending on the dates they become unit holders.
See accompanying notes to financial statements.
NET 2 L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (In thousands)
Years ended December 31, 1998, 1997 and 1996
See accompanying notes to financial statements.
NET 2 L.P.
STATEMENTS OF CASH FLOWS (In thousands)
Years ended December 31, 1998, 1997 and 1996
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.
See accompanying notes to financial statements.
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. The Partnership and Basis of Presentation
Net 2 L.P. (the "Partnership") was formed as a limited partnership on November 9, 1988 under the laws of the State of Delaware to invest in real estate properties or interests therein net leased to corporations or other entities. The Partnership terminates on December 31, 2028, unless sooner terminated by law.
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, 1998, there were 2,049 investors holding 477,167 limited partnership units.
2. Summary of Significant Accounting Policies
The Partnership's financial statements are prepared on the accrual basis of accounting for financial reporting purposes.
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.
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.
Rental revenue is recognized on a straight-line basis over the minimum lease terms.
(Continued)
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
2. Continued
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, 1998, the restricted cash represents proceeds from the sale of a property restricted for investment in future acquisitions.
Deferred expenses are comprised of loan fees which are amortized using the straight-line method over the terms of the loans.
The Partnership uses the accrual basis of accounting for Federal income tax purposes. No provision for income taxes has been made as the liability for any such taxes is that of the partners rather than the Partnership.
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, 1998 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 in a current transaction between willing parties. The Partnership's cash, mortgage notes payable, and accounts payable and accrued liabilities are considered to be financial instruments and are carried at cost, which approximates fair value.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," were issued. SFAS No. 130 established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods, provided for comparative purposes, is required. The statement also requires the accumulated balance of other comprehensive income to be displayed separately from retained earnings and additional paid-in capital in equity section of the balance sheet. SFAS No. 131 establishes standards for reporting information about operating segments in annual and interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Categories required to be reported as well as reconciled to the financial statements are segment profit or loss, certain specific revenue and expense items, and segment assets. SFAS No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997. The adoption of these standards had no impact on the Partnership's financial position and operating results as of and for the year ended December 31, 1998.
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 financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(Continued)
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
2., Continued
Certain amounts included in the prior years' financial statements have been reclassified to conform with the current years' 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 and will not be 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.
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, 1998 totaled $24.194 million ($49.46 to $51.40 per Unit, per close). On January 29, 1999, the cumulative preferred return that was unpaid at December 31, 1998 was reduced by a cash distribution to the Limited Partners for the quarter ended December 31, 1998 totaling $596,459 ($1.25 per unit). The General Partner received a cash distribution of $12,173 on January 29, 1999.
Cash distributions paid per Unit of limited partnership interest for each of the years in the three-year period ended December 31, 1998 was $5.00.
The Partnership Agreement was restated and amended on June 13, 1994, which enables the Partnership to make additional real estate investments.
Taxable income, as defined, before depreciation, generally is allocated in the same proportion as distributions of distributable cash or proceeds 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 proceeds from capital transactions.
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
4. Investments in Real Estate
Following is a detailed schedule of the Partnership's real estate, including properties held for sale, and lease terms at December 31, 1998:
(*) As of December 31, 1998, thirteen of the fourteen properties are held for sale.
During the year, the Partnership sold the Sandusky and Seattle Properties for a net proceeds of $11.8 million and recognized a net gain of approximately $4.5 million.
The following unaudited pro forma operating information for the years ended December 31, 1998 and 1997, were prepared as if the properties acquired in 1997 and 1998 and the properties disposed in 1998, have been consummated as of January 1, 1997 and the effect carried forward through December 31, 1997 and 1998. The information provided does not purport to be indicative of what the operating results of the Partnership would have been had the acquisition been consummated on the date assumed. The pro forma amounts (in thousands, except per Unit amounts) follow:
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
4., Continued
The Partnership has been incurring costs relating to environmental investigation and re-mediation related to the Total Petroleum properties. If the cost exceeds $10,000 for any one property, the Partnership applies for reimbursements in excess of $10,000 to the Michigan Underground Storage Tank Financial Assurance Fund ("MUSTFA"). All claims are subject to approval by MUSTFA. These costs are not expected to have a material impact on the financial position or results of operations of the Partnership. The Partnership has received partial reimbursement of such costs which were included in interest and other income in the accompanying statements of income.
5. Mortgage Notes Payable
Following is a detailed schedule of the Partnership's mortgage notes payable as of December 31, 1998 and 1997 ($000's):
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, 1998, the outstanding balance on the line of credit was $24.44 million with an interest rate of 8.77%. The line of credit matures on May 1, 2000.
The line of credit is secured by mortgages on thirty-three of the thirty-eight properties and by a negative declaration by the Partnership that the Properties owned will not be mortgaged to secure any other indebtedness. If the appraised 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.
Required principal payments of the mortgage notes payable for the succeeding five years are as follows ($000's):
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
6. Leases
Minimum future rental payments receivable under noncancelable operating leases for the properties as of December 31, 1998, are as follows ($000's):
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,:
(a) These properties consist of two office/warehouse facilities, one in Ohio and one in Arizona. (b) These properties consist of thirteen retail stores. (c) These properties consist of fourteen retail stores.
7. Related Parties
The General Partner has granted Lexington Corporate Properties Trust (the "Company"), whose chairman and Co-Chief Executive Officer is chairman of the General Partner, an option exercisable at any time, to acquire the general partnership interest. The Company provides the Partnership various administrative services. Under the terms of the option, the Company, 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 the Company retaining the option of paying such fair market value in securities of the Company, 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, 1998, 1997 and 1996, management fees which are included in general and administrative expenses totaled $66,000, $57,000 and $52,000, respectively.
(Continued)
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
7., Continued
Officers of affiliates of the General Partner and Lexington Corporate Properties Trust received acquisition fees totaling $348,400 and $70,500 for the years ended December 31, 1998 and 1997, respectively.
Beginning in October 1996, Lexington Corporate Properties Trust has been reimbursed by the Partnership for various administrative services performed. For the years ended December 31, 1998, 1997 and 1996, such reimbursements totaled $240,000, $170,000 and $109,000, respectively.
8. Subsequent Events
On October 16, 1998, the Partnership entered into an agreement to purchase a property located in Ocala, Florida for approximately $19.5 million. The property consist of approximately 696,597 square foot warehouse and distribution building, net leased to Associated Grocers of Florida, Inc. through December 31, 2018. The partnership obtained financing on January 5, 1999. The acquisition closed on January 7, 1999.
On November 5, 1998, the Partnership entered into an agreement to sell thirteen of the fourteen NCS Properties for approximately $5.425 million. As of December 31, 1998, the book value of the properties was approximately $4.65 million, including rent receivable of approximately $526,000. The sale closed on January 25, 1999.
Schedule III
NET 2 L. P. Real Estate and Accumulated Depreciation December 31, 1998, 1997, and 1996 Initial cost to Partnership and gross amount at which carried at end of period (A) (In thousands)
- ---------- (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, 1998 for Federal income tax purposes was $62,148. (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:
(E) These properties consist of two office/warehouse facilities, one in Ohio constructed in 1968 and one in Arizona constructed in 1981. (F) These properties consist of 12 retail stores.
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 General Partner has granted Lexington corproate Properties Trust (the "Company"), whose chairman and Co-Chief Executive Officer is chairman of the General Partner, an option exercisable at any time, to acquire the general partnership interest. The Company privided the Partnership various administrative services. Under the terms of the option, the Company, subject to review 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 the Company retaining the option of paying such fair market value in securities of the Company, limited partnership units in controlled subsidiaries, cash or a combination thereof.
The directors and executive officers of Lepercq Net 2 Inc. are as follows:
Name Position ---- -------- E. Robert Roskind President and Secretary Denise E. DeBaun Vice President David J. Walsh Vice President and Treasurer Dianne R. Smith Assistant Secretary
Certain biographical information relating to the directors and executive officers of Lepercq Net 2 Inc. is set forth below.
E. Robert Roskind, age 54, has been associated with LCP since 1973 and has been Chairman of 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 Berkshire Realty Company, Inc., Krupp Government Income Trust I and Krupp Government Income Trust II.
Denise E. DeBaun, age 48, has been associated with LCP since 1981. She was a member of the marketing department from 1986 to 1990. She also serves as an Administrative 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.
David J. Walsh, age 32, has been associated with LCP since 1993. He has served as Senior Vice President of LCP since January 1997 and as Director of Acquisitions since June 1993. Prior to joining LCP, Mr. Wash was associated with Glaxo Inc., a Fortune 500 pharmaceutical company, as a Pharmaceutical Sales Representative. Mr. Walsh received his bachelor's degree from Western New England College in 1989.
Dianne R. Smith, age 52, has been associated with LCP since 1988 as their 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.
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 1998.
The directors and executive officers of Lepercq Net 2 Inc. received no remuneration from the Partnership.
The General Partner and its affiliates were paid certain fees and commissions and reimbursed for certain expenses.
Information concerning the cash distributions to the General Partner, and fees, commissions and reimbursements paid to it or its affiliates, is contained in the Statements of Changes in Partners' Capital (Deficit) and in Notes 3 and 7 of Notes to Financial Statements in Item 8 above.
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, 1998.
(c) Lexington Corporate Properties Trust, an affiliate of the General Partner, owns 3,843 units as of December 31, 1998.
ITEM 13.
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, 1998, 1997 and 1996, management fees which are included in general and administrative expenses totaled $66,000, $57,000 and $52,000, in 1998, 1997 and 1996, respectively.
Officers of affiliates of the General Partner and Lexington Corporate Properties Trust received acquisition fees totaling $348,400 and $70,500 for the year ended December 31, 1998 and 1997, respectively.
Beginning in October 1996, Lexington Corporate Properties Trust has been reimbursed by the Partnership for various administrative services performed. For the years ended December 31, 1998, 1997 and 1996, such reimbursements totaled $240,000, $170,000 and $109,000, 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.
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.
(b) Reports on Form 8-K filed in the fourth quarter of 1998. Form 8-K dated September 29, 1998, filed October 13, 1998. Provided financial information for certain acquired property and pro forma financial information for the Partnership.
(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
By: /s/ E. Robert Roskind By: /s/ Brenda Lubrin --------------------------- ---------------------------- President Assistant Accounting Officer
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.
Signature Title --------- -----
/s/ E. Robert Roskind President and Secretary ------------------------------- E. Robert Roskind
/s/ Denise E. DeBaun Vice President ------------------------------- Denise E. DeBaun
/s/ David J. Walsh Vice President and Treasurer ------------------------------- David J. Walsh
/s/ Dianne R. Smith Assistant Secretary ------------------------------- Dianne R. Smith
Date: March 31, 1999 -------------------------------