<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 March 31, 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
March 31, 1996 (Unaudited) and December 31, 1995
<TABLE>
<CAPTION>
ASSETS
March 31, 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 5,729,789 5,481,337
----------- -----------
44,163,270 44,411,722
Cash 937,461 733,135
Restricted cash 67,890 88,677
Deferred expenses (net of accumulated amortization of
$479,419 and $441,068 in 1996 and 1995, respectively) 608,251 590,602
Rent receivable 1,655,726 1,535,664
Other assets 296,783 298,535
----------- -----------
$47,729,381 $47,658,335
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable $14,648,225 $14,721,188
Accrued interest payable 98,728 106,119
Accounts payable and other liabilities 261,069 186,953
----------- -----------
15,008,022 15,014,260
----------- -----------
Partners' capital (deficit):
General Partner (358,967) (360,513)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 33,080,326 33,004,588
----------- -----------
Total partners' capital 32,721,359 32,644,075
----------- -----------
$47,729,381 $47,658,335
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L.P.
STATEMENTS OF INCOME
Quarters Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Revenues:
Rental $1,402,554 $1,148,687
Interest and other 11,127 80,682
---------- ----------
1,413,681 1,229,369
---------- ----------
Expenses:
Interest expense 355,239 375,772
Depreciation 248,452 263,571
Amortization of deferred expenses 38,351 49,718
General, administrative, and other 85,724 190,058
---------- ----------
727,766 879,119
---------- ----------
Net income $ 685,915 $ 350,250
========== ==========
Net income per Unit of limited
partnership interest $ 1.41 $ 0.72
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L.P.
STATEMENTS OF CASH FLOWS
Quarters ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 685,915 $ 350,250
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 286,803 313,289
(Increase) decrease in rents receivable (120,062) 11,898
(Decrease) increase in accrued interest payable (7,391) 155
Decrease (increase) in other assets 1,752 (31,667)
Increase in accounts payable and other
liabilities 74,116 35,136
--------- ----------
Total adjustments 235,218 328,811
--------- ----------
Net cash provided by operating activities 921,133 679,061
--------- ----------
Cash flows from financing activities:
Decrease in restricted cash 20,787 2,969,720
Principal payments on mortgage notes (72,963) (69,768)
Increase in deferred expenses (56,000) -
Cash distributions to partners (608,631) (608,631)
--------- ----------
Net cash (used in) provided by financing activities (716,807) 2,291,321
--------- ----------
Net increase in cash 204,326 2,970,382
Cash at beginning of period 733,135 1,704,042
--------- ----------
Cash at end of period $ 937,461 $4,674,424
========= ==========
Supplemental cash flow information:
Cash paid during the period for interest $ 362,630 $ 375,617
========= ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 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 March 31, 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 March 31, 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 ended March 31, 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.
On January 1, 1996, the Company 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, certain
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 had no effect on the Company's results of
operations or its financial condition for the quarter ended March 31,
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.
<PAGE> 6
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
3. The Partnership Agreement
As of March 31, 1996, the Partnership has made cumulative cash
distributions to the Limited Partners totaling $17,060,628. The unpaid
cumulative preferred return at March 31, 1996 totaled $16,320,802
($32.96 to $34.90 per Unit).
On April 30, 1996, the cumulative preferred return that was unpaid at
March 31, 1996, was reduced by a cash distribution to the Limited
Partners for the quarter ended March 31, 1996 totaling $596,459 ($1.25
per Unit) and $12,173 to the General Partner.
4. Mortgage Notes Payable
Principal paydowns of the morgage notes paybale for the succeeding five
years are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
---------------
<S> <C>
1996 (9 months) $222,641
1997 327,240
1998 358,775
1999 241,414
2000 101,569
2001 109,999
</TABLE>
5. Leases
Minimum total annual future rental payments receivable under the
noncancelable operating leases for the properties as of March 31, 1996,
follow:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1996 (9 months) $ 3,816,567
1997 5,043,796
1998 5,118,035
1999 5,156,649
2000 5,230,349
2001 5,282,101
Thereafter 42,155,755
-----------
$71,803,252
===========
</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.
<PAGE> 7
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
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 March 31, 1996, a
property management fee of $12,825 had been paid or accrued to Leased
Properties Management, Inc.
7. Subsequent Events
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.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of March 31, 1996, the Partnership has made cumulative cash distributions to
the Limited Partners totaling $17,060,628. The unpaid cumulative preferred
return at March 31, 1996 totaled $16,320,802 (see note 3 of Notes to the
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. As of March 31, 1996, the Partnership's cash
balances were $937,461, or 1.96% of the gross proceeds of the offering.
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 three months ended March 31, 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 three months ended March 31, 1996 increased $184,312 from
the same period in 1995. Rental revenues increased $253,867 from the same period
in 1995. The increase in rental revenue is primarily due to the increase in
rentals in accordance with various leases, and rental revenue from property
acquired in the third quarter of 1995. Interest and other revenues decreased
$69,555 from the same period in 1995. The decrease in interest and other revenue
is primarily due to lower interest-bearing cash balances maintained in 1996.
Total expenses for the three months ended March 31, 1996 decreased $151,353 from
the same period in 1995, primarily due to a decrease in, general and
administrative expenses. General and administrative expenses decreased $104,334
due to lower property operating costs in 1996 and non-recurring legal expenses
in 1995.
Net income for the three months ended March 31, 1996 increased $335,665 from the
same period in 1995 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
March 31, 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: _____________________________ By: ___________________
E. Robert Roskind
President
<PAGE> 11
EXHIBIT INDEX
Exhibit No. Description
- - ---------- -----------
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 QUARTER ENDED MARCH 31, 1996 AND THE BALANCE
SHEET AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1005351
<SECURITIES> 0
<RECEIVABLES> 1655726
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 49893059
<DEPRECIATION> (5729789)
<TOTAL-ASSETS> 47729381
<CURRENT-LIABILITIES> 0
<BONDS> 14648225
0
0
<COMMON> 0
<OTHER-SE> 32721359
<TOTAL-LIABILITY-AND-EQUITY> 47729381
<SALES> 0
<TOTAL-REVENUES> 1413681
<CGS> 0
<TOTAL-COSTS> 248452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 393590
<INCOME-PRETAX> 685915
<INCOME-TAX> 0
<INCOME-CONTINUING> 685915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 685915
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
