<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 September 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
September 30, 1996 (Unaudited) and December 31, 1995
<TABLE>
<CAPTION>
ASSETS
September 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 6,226,693 5,481,337
------------ ------------
43,666,366 44,411,722
Cash and cash equivalents 4,374,128 733,135
Restricted cash 17,900 88,677
Deferred expenses (net of accumulated amortization of
$550,323 and $441,068 in 1996 and 1995, respectively) 547,370 590,602
Rent receivable 1,793,754 1,535,664
Other assets 248,426 298,535
------------ ------------
$ 50,647,944 $ 47,658,335
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable $ 17,275,968 $ 14,721,188
Accrued interest payable 95,861 106,119
Accounts payable and other liabilities 319,486 186,953
------------ ------------
17,691,315 15,014,260
------------ ------------
Partners' capital (deficit):
General Partner (354,261) (360,513)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 33,310,890 33,004,588
------------ ------------
Total partners' capital 32,956,629 32,644,075
------------ ------------
$ 50,647,944 $ 47,658,335
============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L.P.
STATEMENTS OF INCOME
Quarters Ended September 30, 1996 and 1995 and
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Quarter Ended Quarter Ended Ended Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental $1,357,462 $1,204,449 $4,112,792 3,501,819
Interest and other 45,619 139,840 395,429 348,185
---------- ---------- ---------- ----------
1,403,081 1,344,289 4,508,221 3,850,004
---------- ---------- ---------- ----------
Expenses:
Interest expense 406,453 375,761 1,164,038 1,128,300
Depreciation 248,452 240,620 745,356 761,524
Amortization of deferred expenses 34,003 38,351 109,255 132,103
General, administrative, and other 166,427 235,285 351,125 623,739
---------- ---------- ---------- ----------
855,335 890,017 2,369,774 2,645,666
---------- ---------- ---------- ----------
Income before gain from sale of properties 547,746 454,272 2,138,447 1,204,338
Gain from sale of properties -- -- -- 12,869
---------- ---------- ---------- ----------
Net income $ 547,746 $ 454,272 $2,138,447 $1,217,207
========== ========== ========== ==========
Net income per Unit of limited
partnership interest $ 1.12 $ 0.93 $ 4.39 $ 2.50
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L.P.
STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1996 1995
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,138,447 $ 1,217,207
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 854,611 893,627
Increase in rents receivable (258,090) (48,492)
Gain on sale of properties -- (12,869)
Decrease in accrued interest payable (10,258) (6,657)
Decrease (increase) in other assets 50,109 (134,511)
Increase in accounts payable and other
liabilities 132,533 81,029
----------- -----------
Total adjustments 768,905 772,127
----------- -----------
Net cash provided by operating activities 2,907,352 1,989,334
Cash flows from investing activities:
Proceeds from sale of properties -- 144,984
Investments in real estate -- (4,166,360)
----------- -----------
Net cash used in investing activities -- (4,021,376)
----------- -----------
Cash flows from financing activities:
Proceeds of mortgage notes payable 2,800,000 --
Principal payments on mortgage notes (245,220) (201,647)
Increase in deferred expenses (66,023) --
Decrease in restricted cash 70,777 3,083,695
Cash distributions to partners (1,825,893) (1,825,893)
----------- -----------
Net cash provided by financing activities 733,641 1,056,155
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,640,993 (975,887)
Cash and cash equivalents at beginning of period 733,135 1,704,042
----------- -----------
Cash and cash equivalents at end of period $ 4,374,128 $ 728,155
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,174,296 $ 1,134,957
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
September 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 September 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
The Partnership's financial statements are prepared on the accrual basis
of accounting for financial reporting and Federal income tax reporting
purposes. Real estate is carried at cost less accumulated depreciation
unless declines in the values of properties are considered other than
temporary. Depreciation for financial reporting purposes is determined by
the straight-line method over the estimated economic useful lives of the
properties. The Partnership depreciates buildings over a 40-year period.
Depreciation for tax purposes is determined in accordance with the
Modified Accelerated Cost Recovery System.
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 September 30, 1996, the
Partnership's rent receivable primarily consists of amounts of 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 nine months ended September 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.
For purposes of the Statements of Cash Flows, the Partnership considers
all highly liquid instruments to be cash equivalents. The Balance Sheet
caption cash and cash equivalents includes $4.2 million of money market
instruments at September 30, 1996.
<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
nine months ended September 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 September 30, 1996, the Partnership has made cumulative cash
distributions to the Limited Partners totaling $18,253,546. The unpaid
cumulative preferred return at September 30, 1996, totaled $17,752,303
($37.90 to $35.96 per Unit).
On October 31, 1996, the cumulative preferred return that was unpaid at
September 30, 1996, was reduced by a cash distribution to the Limited
Partners for the quarter ended September 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 (3 months) $ 94,415
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 September 30,
1996, follow:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1996 (3 months) $ 1,301,966
1997 5,230,681
1998 5,304,920
1999 5,343,534
2000 5,417,234
2001 5,468,986
Thereafter 43,495,098
----------
$71,562,419
==========
</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 September 30, 1996, a property management
fee of $38,594 had been paid or accrued to Leased Properties Management,
Inc.
7. Subsequent Events
On October 1, 1996, the Partnership entered into an agreement with Leased
Properties Management Inc., under which Leased Properties Management, Inc.
assigned its responsibilities as management agent to Lexington Corporate
Properties, Inc. E. Robert Roskind is chairman of the board of directors
of Lexington Corporate Properties, Inc., and controls the LCP Group, L.P.
with which Leased Properties Management, Inc. is affiliated.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
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.
As of September 30, 1996, the Partnership has made cumulative cash distributions
to the Limited Partners totaling $18,253,546. The unpaid cumulative preferred
return at September 30, 1996, totaled $17,752,303 (see note 3 of Notes to
Financial Statements).
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 nine months ended September 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 interest earned on interest-bearing bank investments.
Total revenues for the quarter and nine months ended September 30, 1996,
increased $58,792 and $658,217 from the same periods in 1995. Rental revenues
for the quarter and nine months ended September 30, 1996, increased $153,013
and $610,973 from the same periods in 1995 primarily due to rental revenues
received from the Massachusetts property acquired in September of 1995.
Interest and other revenues increased $47,244 from the same period in 1995
primarily due to MUSTFA (Michigan Underground Storage Tank Financial Assurance
Fund) reimbursements received.
Total expenses for the quarter and nine months ended September 30, 1996,
decreased $34,682 and $275,892, from the same periods in 1995. The decreases are
primarily due to decreases in general and administrative expenses. General and
administrative expenses for the quarter and nine months ended September 30,
1996, decreased $68,858 and $272,614 from the same periods in 1995, primarily
due to lower property operating costs incurred in 1996.
Net income for the quarter and nine months ended September 30, 1996, increased
$93,474 and $921,240 from the same periods in 1995, primarily due to the
increase in rental revenues and the decrease in general and administrative
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 September
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: November 7, 1996 By: /s/ E. Robert Roskind
-----------------------
E. Robert Roskind
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) The
interim statement of income for the nine months ended September 30,1996 and
the balance sheet as of September 30,1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,392,028
<SECURITIES> 0
<RECEIVABLES> 1,793,754
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 49,893,059
<DEPRECIATION> (6,226,693)
<TOTAL-ASSETS> 50,647,944
<CURRENT-LIABILITIES> 0
<BONDS> 17,275,968
0
0
<COMMON> 0
<OTHER-SE> 32,956,629
<TOTAL-LIABILITY-AND-EQUITY> 50,647,944
<SALES> 0
<TOTAL-REVENUES> 4,508,221
<CGS> 0
<TOTAL-COSTS> 745,356
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,273,293
<INCOME-PRETAX> 2,138,447
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,138,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,138,447
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
