<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, 1997
[ ] 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
New York, NY 10017
------------------------------ -----------
(Address of principal executive offices) (Zip code)
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, 1997 (Unaudited) and December 31, 1996
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Real estate, at cost
Buildings $ 40,122,562 $ 40,122,562
Land 9,487,396 9,487,396
----------- -----------
49,609,958 49,609,958
Less: accumulated depreciation 6,440,496 6,192,044
----------- -----------
43,169,462 43,417,914
Cash and cash equivalents 4,468,113 4,124,659
Restricted cash - 100,000
Deferred expenses (net of accumulated amortization of
$481,924 and $447,921 in 1997 and 1996, respectively) 479,364 513,367
Rent receivable 1,876,079 1,816,481
Other assets 24,298 29,377
----------- -----------
$ 50,017,316 $ 50,001,798
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable $ 17,081,129 $ 17,181,091
Accrued interest payable 97,700 99,786
Accounts payable and other liabilities 338,535 203,190
----------- -----------
17,517,364 17,484,067
---------- ----------
Partners' capital (deficit):
General Partner (363,396) (363,040)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 32,863,348 32,880,771
---------- ----------
Total partners' capital 32,499,952 32,517,731
---------- ----------
$ 50,017,316 $ 50,001,798
========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L.P.
STATEMENTS OF INCOME
QUARTERS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, March 31,
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Rental $1,361,562 $1,402,554
Interest and other 49,273 11,127
--------- ---------
1,410,835 1,413,681
--------- ---------
Expenses:
Interest expense 395,779 355,239
Depreciation 248,452 248,452
Amortization of deferred expenses 34,003 38,351
General, administrative, and other 141,749 85,724
------- ------
819,983 727,766
------- -------
Net income $ 590,852 $ 685,915
======= =======
Net income per Unit of limited
partnership interest $ 1.21 $ 1.41
==== ====
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L.P.
STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 590,852 $ 685,915
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 282,455 286,803
(Increase) decrease in rents receivable (59,598) (120,062)
(Decrease) increase in accrued interest payable (2,086) (7,391)
Decrease (increase) in other assets 5,079 1,752
Increase in accounts payable and other
liabilities 135,345 74,116
----------- ---------
Total adjustments 361,195 235,218
----------- ---------
Net cash provided by operating activities 952,047 921,133
----------- ---------
Cash flows from financing activities:
Decrease in restricted cash 100,000 20,787
Principal payments on mortgage notes (99,962) (72,963)
Increase in deferred expenses -- (56,000)
Cash distributions to partners (608,631) (608,631)
----------- ---------
Net cash (used in) provided by financing activities (608,593) (716,807)
----------- ---------
Net increase in cash and cash equivalents 343,454 204,326
Cash and cash equivalents at beginning of period 4,124,659 733,135
----------- ---------
Cash and cash equivalents at end of period $ 4,468,113 $ 937,461
=========== =========
Supplemental cash flow information:
Cash paid during the period for interest $ 397,865 $ 362,630
=========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
(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, 1997, 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, 1996.
2. Summary of Significant Accounting Policies
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.
For purposes of the statement of cash flows, the Partnership considers
all highly liquid instruments to be cash equivalents. The balance sheet
caption cash and cash equivalents includes $4.339 million of money
market instruments at March 31, 1997.
The leases relating to the properties are operating leases in
accordance with SFAS 13. Rental revenue is recognized on a
straight-line basis over the minimum lease terms. At March 31, 1997,
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, 1997 and 1996.
<PAGE> 6
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
2. Continued
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
For financial statement reporting purposes all items of income are
allocated in the same proportion as distributions of distributable
cash.
As of March 31, 1997, the Partnership has made cumulative cash
distributions to the Limited Partners totaling $19,446,463. The unpaid
cumulative preferred return at March 31, 1997 totaled $19,183,804
($38.96 to $40.90 per Unit).
On April 30, 1997, the cumulative preferred return that was unpaid at
March 31, 1997, was reduced by a cash distribution to the Limited
Partners for the quarter ended March 31, 1997 totaling $596,459 ($1.25
per Unit) and $12,173 to the General Partner.
4. Mortgage Notes Payable
Principal paydowns of the mortgage notes payable for the succeeding
five years are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1997 (9 months) $ 298,249
1998 435,258
1999 11,137,232
2000 190,395
2001 205,724
2002 222,290
=======
</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 March 31, 1997,
follow:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C> <C>
1997 (9 months) $ 3,928,719
1998 5,304,920
1999 5,343,534
2000 5,417,236
2001 5,468,987
2002 5,457,281
Thereafter 37,995,319
----------
$68,915,996
==========
</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 March 31, 1997, a
property management fee of $13,020 had been paid or accrued to Leased
Properties Management, Inc.
7. Subsequent Events
On April 21, 1997, the Partnership entered into an agreement to
purchase a property located in Wayne County, Michigan. The property is
being leased to Wal-mart Stores, Inc. The lease has an annual base
rent of $752,776.79. The monthly payments of $62,731.40 is due and
payable on or before the first day of each month. The purchase price is
$7.050 million which includes the assumption of a note with the
outstanding principal and accrued interest not to exceed approximately
$4.7 million, with interest in the rate of 10 1/2% 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, 1997, the Partnership has made cumulative cash distributions to
the Limited Partners totaling $19,446,463. The unpaid cumulative preferred
return at March 31, 1997 totaled $19,183,804 (see note 3 of Notes to the
Financial Statements).
On April 21, 1997, the Partnership entered into an agreement to purchase a
property located in Wayne County, Michigan. The property is being leased to
Wal-mart Stores, Inc. The lease has an annual base rent of $752,776.79. The
monthly payments of $62,731.40 is due and payable on or before the first day of
each month. The purchase price is $7.050 million which includes the assumption
of a note with the outstanding principal and accrued interest not to exceed
approximately $4.7 million, with interest in the rate of 10 1/2% 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 distribution in accordance with the provisions of it's Partnership
Agreement.
Results of Operations
The results of operations for the three months ended March 31, 1997, (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 three months ended March 31, 1997 decreased $2,846 from
the same period in 1996. Rental revenues decreased slightly by $40,992 from the
same period in 1996. Interest and other revenues increased $38,146 from the
same period in 1996. The increase in interest and other revenue is primarily
due to higher cash balances maintained in the first quarter of 1997.
Total expenses for the three months ended March 31, 1997 increased $92,217 from
the same period in 1996, primarily due to increases in interest expense and,
general and administrative expenses. Interest expense increased $40,540 due to
financing of the Massachusetts Property. General and administrative expenses
increased $56,025 due to an increase in property operating costs.
Net income for the three months ended March 31, 1997 decreased $95,063 from the
same period in 1996 primarily due to the decrease in revenues and the increase
in expenses discussed above.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings
Per Share ("APB 15") and specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS and fully diluted
EPS with diluted EPS. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
stuctures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. This statement will be adopted for both interim and annual period
ending after December 15, 1997. The adoption of this SFAS has no effect on the
Partnership's results of operations or its financial condition for the quarter
ended March 31, 1997.
<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.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on form 8-K filed during the quarter ended
March 31, 1997.
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: May 15, 1997 By /s/ E. Robert Roskind
------------ ---------------------
E. Robert Roskind
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND THE BALANCE
SHEET AS OF MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,468,113
<SECURITIES> 0
<RECEIVABLES> 1,876,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 49,609,958
<DEPRECIATION> (6,440,496)
<TOTAL-ASSETS> 50,017,316
<CURRENT-LIABILITIES> 0
<BONDS> 17,081,129
0
0
<COMMON> 0
<OTHER-SE> 32,499,952
<TOTAL-LIABILITY-AND-EQUITY> 50,017,316
<SALES> 0
<TOTAL-REVENUES> 1,410,835
<CGS> 0
<TOTAL-COSTS> 248,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 395,779
<INCOME-PRETAX> 590,852
<INCOME-TAX> 0
<INCOME-CONTINUING> 590,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 590,852
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
