<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee required]
For the period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[Fee required]
For the Transition period from _________________ to ________________
Commission File Number 33-25984
NET 2 L.P.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3497738
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o The LCP Group
355 Lexington Avenue 10017
New York, NY (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (212) 692-7200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interests
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x . No .
--- ---
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant.
Not Applicable.
There is no active public market for the units of limited partnership interests
issued by the Registrant.
<PAGE> 2
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NET 2 L.P.
BALANCE SHEETS
June 30, 1996 (Unaudited) and December 31, 1995
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Real estate, at cost
Buildings $40,405,663 $40,405,663
Land 9,487,396 9,487,396
----------- -----------
49,893,059 49,893,059
Less: accumulated depreciation 5,978,241 5,481,337
----------- -----------
43,914,818 44,411,722
Cash 4,134,857 733,135
Restricted cash 17,675 88,677
Deferred expenses (net of accumulated amortization of
$516,320 and $441,068 in 1996 and 1995, respectively) 581,373 590,602
Rent receivable 1,724,204 1,535,664
Other assets 231,160 298,535
----------- -----------
$50,604,087 $47,658,335
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable $17,365,781 $14,721,188
Accrued interest payable 96,013 106,119
Accounts payable and other liabilities 124,779 186,953
----------- -----------
17,586,573 15,014,260
----------- -----------
Partners' capital (deficit):
General Partner (353,044) (360,513)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 33,370,558 33,004,588
----------- -----------
Total partners' capital 33,017,514 32,644,075
----------- -----------
$50,604,087 $47,658,335
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L.P.
STATEMENTS OF INCOME
Quarters Ended June 30, 1996 and 1995 and
Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Quarter Ended Quarter Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental $1,352,776 $1,148,683 $2,755,330 $2,297,370
Interest and other 338,683 127,663 349,810 208,345
---------- ---------- ---------- ----------
1,691,459 1,276,346 3,105,140 2,505,715
---------- ---------- ---------- ----------
Expenses:
Interest expense 402,346 376,767 757,585 752,539
Depreciation 248,452 257,333 496,904 520,904
Amortization of deferred expenses 36,901 44,034 75,252 93,752
General, administrative, and other 98,974 198,396 184,698 388,454
---------- ---------- ---------- ----------
786,673 876,530 1,514,439 1,755,649
---------- ---------- ---------- ----------
Income before gain on sale of stock
and gain from sale of property 904,786 399,816 1,590,701 750,066
Gain from sale of property -- 12,869 -- 12,869
---------- ---------- ---------- ----------
Net income $ 904,786 $ 412,685 $1,590,701 $ 762,935
========== ========== ========== ==========
Net income per Unit of limited
partnership interest $ 1.86 $ 0.85 $ 3.27 $ 1.57
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L.P.
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, June 30,
1996 1995
------ -----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,590,701 $ 762,935
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 572,156 614,656
Increase in rent receivable (188,540) (18,148)
Gain on sale of property -- (12,869)
Decrease in accrued interest payable (10,106) (4,386)
Decrease (increase) in other assets 67,375 (95,868)
(Decrease) increase in accounts payable and other
liabilities (62,174) 98,547
----------- -----------
Total adjustments 378,711 581,932
----------- -----------
Net cash provided by operating activities 1,969,412 1,344,867
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property -- 144,984
----------- -----------
Cash flows from financing activities:
Principal payments on mortgage notes (155,407) (134,932)
Proceeds of mortgage notes payable 2,800,000 --
Increase in deferred expenses (66,023) --
Decrease in restricted cash 71,002 3,036,505
Cash distributions to partners (1,217,262) (1,217,262)
----------- -----------
Net cash provided by financing activities 1,432,310 1,684,311
----------- -----------
Net increase in cash 3,401,722 3,174,162
Cash at beginning of period 733,135 1,704,042
----------- -----------
Cash at end of period $ 4,134,857 $ 4,878,204
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 767,691 $ 756,925
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements
<PAGE> 5
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
1. The Partnership and Basis of Presentation
Net 2 L.P. (the "Partnership") was formed as a limited partnership on
November 9, 1988, under the laws of the State of Delaware. The purpose
of the limited partnership is to invest in real estate properties or
interests therein net leased to corporations or other entities.
As of June 30, 1996, the Partnership has a total of 477,167 Units
issued and outstanding held by approximately 2,300 limited partners.
The unaudited financial statements reflect all adjustments that are, in
the opinion of the General Partner, necessary to a fair statement of
the results for the interim period presented. For a more complete
understanding of the Partnership's financial position and accounting
policies, reference is made to the financial statements previously
filed with the Securities and Exchange Commission with the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1995.
2. Summary of Significant Accounting Policies
For financial statement reporting purposes all items of income are
allocated in the same proportion as distributions of distributable
cash.
The Partnership has determined that the leases relating to the
properties are operating leases. Rental revenue is recognized on a
straight-line basis over the minimum lease terms. At June 30, 1996, the
Partnership's rent receivable primarily consists of amounts for the
excess of rental revenues recognized on a straight-line basis over the
rents' collectible under the leases.
The net income per Unit amounts were calculated by using the weighted
average number of Units outstanding for each period and allocating the
income attributable for that period to the Limited Partners. The
weighted average number of Units outstanding was 477,167, during each
of the quarters and six months ended June 30, 1996 and 1995.
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards 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 carried
at cost, which approximates fair value.
<PAGE> 6
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
2. Continued
Certain amounts included in the prior year's financial statements have
been reclassified to conform with the current year's presentation.
On January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." This SFAS establishes the recognition and measurement
criteria for impairment losses on long-lived assets, identifiable
intangibles and goodwill related to those assets to be held and used
and for long-lived assets and certain identifiable intangibles to be
disposed of. This SFAS requires that an impairment loss be recognized
when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of this SFAS
has no effect on the Partnership's results of operations or its
financial condition for the quarter and six months ended June 30, 1996.
Management of the partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
3. The Partnership Agreement
As of June 30, 1996, the Partnership has made cumulative cash
distributions to the Limited Partners totaling $17,657,087. The unpaid
cumulative preferred return at June 30, 1996, totaled $17,036,552
($34.46 to $36.40 per Unit).
On July 31, 1996, the cumulative preferred return that was unpaid at
June 30, 1996, was reduced by a cash distribution to the Limited
Partners for the quarter ended June 30, 1996, totaling $596,459 ($1.25
per Unit) and $12,173 to the General Partner.
4. Mortgage Notes Payable
On April 4, 1996, the Partnership received financing secured by a
mortgage on the Massachusetts Property for $2.8 million. The loan has
a 232-month term with an interest rate of 7.5% per annum.
Principal paydowns of the mortgage notes payable for the succeeding
five years are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1996 (6 months) $184,228
1997 397,240
1998 434,209
1999 322,704
2000 189,170
2001 204,401
</TABLE>
<PAGE> 7
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
5. Leases
Minimum total annual future rental payments receivable under the
noncancelable operating leases for the properties as of June 30, 1996,
follow:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1996 (6 months) $ 2,532,267
1997 5,043,796
1998 5,118,035
1999 5,156,649
2000 5,230,349
2001 5,282,101
Thereafter 42,155,755
-----------
$70,518,952
===========
</TABLE>
The leases are triple 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.
6. Related Party Transactions
Leased Properties Management, Inc., an affiliate of the General
Partner, is entitled to receive a fee for managing the Partnership's
properties in the amount of 1% of gross annual rental receipts (or a
greater amount in certain circumstances). As of June 30, 1996, a
property management fee of $25,668 had been paid or accrued to Leased
Properties Management, Inc.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of June 30, 1996, the Partnership has made cumulative cash distributions to
the Limited Partners totaling $17,657,087. The unpaid cumulative preferred
return at June 30, 1996, totaled $17,036,552 (see note 3 of Notes to Financial
Statements).
On April 4, 1996, the Partnership received financing secured by a mortgage on
the Massachusetts Property for $2.8 million. The loan has a 232-month term with
an interest rate of 7.5% per annum.
The Partnership attempts to maintain a working capital reserve equal to 1.5% of
the gross proceeds of its offering which is anticipated to be sufficient to
satisfy liquidity requirements. Liquidity could be adversely affected by
unanticipated costs, particularly costs relating to the vacancy of properties,
tenants experiencing financial difficulties, and greater than anticipated
operating expenses. To the extent that such working capital reserves are
insufficient to satisfy the cost requirements of the Partnership, additional
funds may be obtained through short-term or permanent loans or by reducing
distributions to limited partners.
There are no material restrictions (other than the debt service requirements
under the mortgage notes) upon the Partnership's present or future ability to
make distributions in accordance with the provisions of its Partnership
Agreement.
Results of Operations
The results of operations for the quarter and six months ended June 30, 1996,
(see Statements of Income) are attributable to the acquisition and operation of
the thirty-six real property investments, purchased from 1989 to 1995 and
interests earned on interest-bearing bank investments.
Total revenues for the quarter and six months ended June 30, 1996, increased
$415,113 and $599,425 from the same periods in 1995. Rental revenues for the
quarter and six months ended June 30, 1996, increased $204,093 and $457,960 from
the same periods in 1995. The increase is primarily due to rental revenues
received from the Massachusetts property acquired in December 1995. Interest and
other income for the quarter ended June 30, 1996, increased $211,020 and
$141,465 from the same periods in 1995. The increases aredue to MUSTFA
(Michigan Underground Storage Tank Financial Assurance Fund) reimbursements
received and gain from the sale of the NCS stocks.
Total expenses for the quarter and six months ended June 30, 1996, decreased
$89,857 and $241,210 from the same periods in 1995. The decrease is primarily
due to a decrease in general and administrative expenses. General and
administrative expenses for the quarter and six months ended June 30, 1996,
decreased $99,422 and $203,756 from the same periods in 1995. The decrease is
due to lower property operating costs in 1996.
Net income for the quarter and six months ended June 30, 1996, increased
$492,101 and $827,766 from the same periods in 1995. The increases are
primarily due to the increase in revenues and the decrease in expenses
discussed above.
<PAGE> 9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Changes in Securities - not applicable.
ITEM 3. Defaults under the Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders - not applicable.
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
(b) Reports on form 8-K filed during the quarter ended June
30, 1996.
None.
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET 2 L.P.
By: Lepercq Net 2 L.P.
its general partner
By: Lepercq Net 2 Inc.
its general partner
Date: August 12, 1996 By: /s/ E. Robert Roskind
-------------------- ------------------------
E. Robert Roskind
President
<PAGE> 11
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
INTERIM STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE
BALANCE SHEET AS OF JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000843756
<NAME> NET 2 L P
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,152,532
<SECURITIES> 0
<RECEIVABLES> 1,724,204
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 49,893,059
<DEPRECIATION> (5,978,241)
<TOTAL-ASSETS> 50,604,087
<CURRENT-LIABILITIES> 0
<BONDS> 17,365,781
0
0
<COMMON> 0
<OTHER-SE> 33,017,514
<TOTAL-LIABILITY-AND-EQUITY> 50,604,087
<SALES> 0
<TOTAL-REVENUES> 3,105,140
<CGS> 0
<TOTAL-COSTS> 496,904
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 832,837
<INCOME-PRETAX> 1,590,701
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,590,701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,590,701
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
