<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
For the period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Lexington Corporate Properties, Inc.
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
September 30, 1997 (Unaudited) and December 31, 1996
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Real estate, at cost $ 57,513,533 $ 49,609,958
Less: accumulated depreciation 6,980,447 6,192,044
------------ ------------
50,533,086 43,417,914
Cash and cash equivalents 2,202,129 4,124,659
Restricted cash -- 100,000
Deferred expenses (net of accumulated amortization of
$549,930 and $447,921 in 1997 and 1996, respectively) 411,358 513,367
Rent receivable 2,010,105 1,816,481
Other assets 31,048 29,377
------------ ------------
$ 55,187,726 $ 50,001,798
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable $ 22,279,458 $ 17,181,091
Accrued interest payable 95,915 99,786
Accounts payable and other liabilities 320,302 203,190
------------ ------------
22,695,675 17,484,067
------------ ------------
Partners' capital (deficit):
General Partner (363,554) (363,040)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 32,855,605 32,880,771
------------ ------------
Total partners' capital 32,492,051 32,517,731
------------ ------------
$ 55,187,726 $ 50,001,798
============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L.P.
STATEMENTS OF INCOME
Quarters Ended September 30, 1997 and 1996 and
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Quarter Ended Quarter Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Rental $1,583,230 $1,357,462 $4,369,767 $4,112,792
Interest and other 31,378 45,619 122,950 395,429
---------- ---------- ---------- ----------
1,614,608 1,403,081 4,492,717 4,508,221
---------- ---------- ---------- ----------
Expenses:
Interest expense 505,206 406,453 1,338,178 1,164,038
Depreciation 285,349 248,452 788,403 745,356
Amortization of deferred expenses 34,003 34,003 102,009 109,255
General, administrative, and other 122,953 166,427 463,913 351,125
---------- ---------- ---------- ----------
947,511 855,335 2,692,503 2,369,774
---------- ---------- ---------- ----------
Net income $ 667,097 $ 547,746 $1,800,214 $2,138,447
========== ========== ========== ==========
Net income per Unit of limited
partnership interest $ 1.37 $ 1.12 $ 3.70 $ 4.39
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L.P.
STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,800,214 $ 2,138,447
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 890,412 854,611
Increase in rents receivable (193,624) (258,090)
Other, net (5,542) 39,851
Increase in accounts payable and other
liabilities 117,112 132,533
----------- -----------
Total adjustments 808,358 768,905
----------- -----------
Net cash provided by operating activities 2,608,572 2,907,352
----------- -----------
Cash flows used in investing activities:
Acquisition of property, net of mortgage
liability assumed (2,419,233) --
----------- -----------
Cash flows from financing activities:
Principal payments on mortgage notes (385,975) (245,220)
Proceeds of mortgage notes payable -- 2,800,000
Increase in deferred expenses -- (66,023)
Decrease in restricted cash 100,000 70,777
Cash distributions to partners (1,825,894) (1,825,893)
----------- -----------
Net cash used in financing activities (2,111,869) 733,641
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,922,530) 3,640,993
Cash and cash equivalents at beginning of period 4,124,659 733,135
----------- -----------
Cash and cash equivalents at end of period $ 2,202,129 $ 4,374,128
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,342,049 $ 1,174,296
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
On June 6, 1997, in connection with the acquisition of the Michigan Property,
the Partnership assumed approximately $4.7 million of first mortgage financing.
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 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 September 30, 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, include $2.2 million of money
market instruments at September 30, 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 September 30,
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 and nine months ended September 30, 1997 and 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.
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 September 30, 1997, the Partnership has made cumulative cash
distributions to the Limited Partners totaling $20,639,380. The unpaid
cumulative preferred return at September 30, 1997 totaled $20,615,305
($43.90 to $41.96 per Unit).
On October 31, 1997, the cumulative preferred return that was unpaid at
September 30, 1997, was reduced by a cash distribution to the Limited
Partners for the quarter ended September 30, 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>
1997 (3 months) $ 173,652
1998 728,892
1999 11,453,661
2000 531,390
2001 573,192
2002 618,284
=======
</TABLE>
<PAGE> 7
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
5. Properties
On June 6, 1997, the Partnership acquired a property located in
Westland, Michigan (the "Michigan Property") from an unrelated party.
The Michigan Property consists of 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
lease provides for annual rental payments of $752,776 or $7.32 per
square foot. In addition to net rent, Wal-Mart is required to pay
percentage rent equal to 1% of gross sales in excess of base gross
receipts as defined, during the fiscal year May 1 to April 30, payable
on July 1. The lease does not provide for any renewal options. Wal-Mart
Stores, Inc. has the option to purchase the Michigan Property on
January 31, 2009 at a price equal to the greater of $6,406,611 or the
fair market value.
The purchase price of $7,050,000 and related expenses of approximately
$81,000 were satisfied by a cash payment and by an assumption of an
existing note with a principal balance of $4,712,263. The note bears
interest at a stated rate of 10.5% per annum, with a monthly debt
service payment of principal and interest in the amount of $56,908 to
fully amortize the note by September 1, 2009. The purchase of the
Michigan Property has been recorded in the financial statements at its
cost, calculated as 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 $5,484,342.
The following unaudited pro forma operating information for the nine
months ended September 30, 1997 and September 30, 1996 were prepared
as if the above acquisition had been consummated as of January 1, 1997
and January 1, 1996, respectively. The information provided do not
purport to be indicative of what the operating results of the
Partnership would have been had the acquisition been consummated on
the dates assumed. The pro forma amounts are as follows:
<TABLE>
Unaudited Pro Forma Historical
Quarter Ended Quarter Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues $4,816,829 $5,072,803 $4,492,717 $4,508,221
Net income $1,886,369 $2,283,364 $1,800,214 $2,138,447
Net income per unit of
limited partnership
interest $ 3.87 $ 4.69 $ 3.70 $ 4.39
</TABLE>
Minimum total annual future rental payments receivable under the
noncancelable operating leases for the properties as of September 30,
1997, follow:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1997 (3 months) $ 1,527,878
1998 6,147,049
1999 6,185,663
2000 6,259,365
2001 6,311,116
2002 6,299,410
Thereafter 42,798,092
--------------
$ 75,528,573
==============
</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> 8
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 September 30, 1997, a
property management fee of $41,761 had been paid or accrued to Leased
Properties Management, Inc.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
On June 6, 1997, the Partnership acquired a property located in Westland,
Michigan (the "Michigan Property") from an unrelated party. The Michigan
Property consists of 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 lease
provides for annual rental payments of $752,776, or $7.32 per square foot. In
addition to net rent, Wal-Mart is required to pay percentage rent equal to 1% of
gross sales in excess of base gross receipts as defined, during the fiscal year
May 1 to April 30, payable on July 1. The lease does not provide for any renewal
options. Wal-Mart Stores, Inc. has the option to purchase the Michigan Property
on January 31, 2009 at a price equal to the greater of $6,406,611 or the fair
market value.
The purchase price of $7,050,000 and related expenses of approximately $81,000
were satisfied by a cash payment and by an assumption of an existing note with a
principal balance of $4,712,263. The note bears interest at a stated rate of
10.5% per annum, with a monthly debt service payment of principal and interest
in the amount of $56,908 to fully amortize the note by September 1, 2009. The
purchase of the Michigan Property has been recorded in the financial statements
at its cost, calculated as 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 $5,484,342.
As of September 30, 1997, the Partnership has made cumulative cash distributions
to the Limited Partners totaling $20,639,380. The unpaid cumulative preferred
return at September 30, 1997 totaled $20,615,305 (see note 3 of Notes to the
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 distribution in accordance with the provisions of its Partnership
Agreement.
<PAGE> 10
Results of Operations
The results of operations for the quarter and nine months ended September 30,
1997, (see Statements of Income) are attributable to the acquisition and
operation of the thirty-seven real property investments, purchased from 1989 to
1997 and interests earned on interest-bearing bank investments.
Total revenues for the quarter ended September 30, 1997 increased $211,527 from
the same period in 1996. The increase is primarily due to rental income on the
Michigan Property acquired in June 1997.
Total revenues for the nine months ended September 30, 1997 decreased $15,504
from the same periods in 1996. The decrease is due to a decrease in interest and
other revenues of $272,479 offset by an increase in rental revenue of $256,975.
The decrease in interest and other revenues is due to MUSTFA (Michigan
Underground Storage Tank Financial Assurance Fund) reimbursements received and
gain from the sale of the NCS stock, both in 1996. The increase in rental
revenue is primarily due to rental income on the Michigan Property acquired in
June 1997.
Total expenses for the quarter and nine months ended September 30, 1997
increased $92,176 and $322,729 from the same periods in 1996. The increases are
primarily due to increases in interest expense and general and administrative
expenses. The increases in interest expense are primarily due to the assumption
of a mortgage note in connection with the acquisition of the Michigan Property
in June 1997. General and administrative expenses for the nine months ended
September 30, 1997 increased primarily due to property appraisals incurred in
1997.
Net income for the quarter ended September 30, 1997 increased $119,351 primarily
due to rental revenue on the Michigan Property, offset by increase in interest
expense on the related debt.
Net income for the nine months ended September 30, 1997 decreased $338,233 from
1996 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 structures
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 would have had no effect on the
Partnership's net income per unit for the quarter and nine months ended
September 30, 1997.
<PAGE> 11
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
----------- -------
27.01 Financial Data Schedule
(b) Reports on form 8-K filed during the quarter ended
September 30, 1997.
None.
<PAGE> 12
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 14, 1997 By: 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 and nine months ended September 30, 1997 and
Balance Sheet as of September 30, 1997 and is qualified in its entirety by
reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,202,129
<SECURITIES> 0
<RECEIVABLES> 2,010,105
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 57,513,533
<DEPRECIATION> (6,980,447)
<TOTAL-ASSETS> 55,187,726
<CURRENT-LIABILITIES> 0
<BONDS> 22,279,458
0
0
<COMMON> 0
<OTHER-SE> 32,492,051
<TOTAL-LIABILITY-AND-EQUITY> 55,187,726
<SALES> 0
<TOTAL-REVENUES> 4,369,767
<CGS> 0
<TOTAL-COSTS> 788,403
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,338,178
<INCOME-PRETAX> 1,800,214
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,800,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,800,214
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
