<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 June 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 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
June 30, 1997 (Unaudited) and December 31, 1996
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Real estate, at cost $ 57,513,533 $ 49,609,958
Less: accumulated depreciation 6,695,098 6,192,044
------------ ------------
50,818,435 43,417,914
Cash and cash equivalents 1,962,431 4,124,659
Restricted cash -- 100,000
Deferred expenses (net of accumulated amortization of
$515,927 and $447,921 in 1997 and 1996, respectively) 445,361 513,367
Rent receivable 1,944,953 1,816,481
Other assets 47,514 29,377
------------ ------------
$ 55,218,694 $ 50,001,798
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable $ 22,446,622 $ 17,181,091
Accrued interest payable 96,427 99,786
Accounts payable and other liabilities 242,060 203,190
------------ ------------
22,785,109 17,484,067
------------ ------------
Partners' capital (deficit):
General Partner (364,723) (363,040)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 32,798,308 32,880,771
------------ ------------
Total partners' capital 32,433,585 32,517,731
------------ ------------
$ 55,218,694 $ 50,001,798
============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L.P.
STATEMENTS OF INCOME
Quarters Ended June 30, 1997 and 1996 and
Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental $1,424,975 $1,352,776 $2,786,537 $2,755,330
Interest and other 42,299 338,683 91,572 349,810
---------- ---------- ---------- ----------
1,467,274 1,691,459 2,878,109 3,105,140
---------- ---------- ---------- ----------
Expenses:
Interest expense 437,193 402,346 832,972 757,585
Depreciation 254,602 248,452 503,054 496,904
Amortization of deferred expenses 34,003 36,901 68,006 75,252
General, administrative, and other 199,211 98,974 340,960 184,698
---------- ---------- ---------- ----------
925,009 786,673 1,744,992 1,514,439
---------- ---------- ---------- ----------
Net income $ 542,265 $ 904,786 $1,133,117 $1,590,701
========== ========== ========== ==========
Net income per Unit of limited
partnership interest $ 1.12 $ 1.86 $ 2.33 $ 3.27
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L.P.
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,133,117 $ 1,590,701
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 571,060 572,156
Increase in rent receivable (128,472) (188,540)
Other, net 17,374 (4,905)
----------- -----------
Total adjustments 459,962 378,711
----------- -----------
Net cash provided by operating activities 1,593,079 1,969,412
----------- -----------
Cash flows from investing activities:
Acquisition of Michigan Property, net
of mortgage liability assumed (2,419,233) --
----------- -----------
Net cash used in investing activities (2,419,233) --
----------- -----------
Cash flows from financing activities:
Principal payments on mortgage notes (218,811) (155,407)
Proceeds of mortgage notes payable -- 2,800,000
Increase in deferred expenses -- (66,023)
Decrease in restricted cash 100,000 71,002
Cash distributions to partners (1,217,263) (1,217,262)
----------- -----------
Net cash (used in) provided by financing activities (1,336,074) 1,432,310
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,162,228) 3,401,722
Cash and cash equivalents at beginning of period 4,124,659 733,135
----------- -----------
Cash and cash equivalents at end of period $ 1,962,431 $ 4,134,857
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 836,331 $ 767,691
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
June 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 June 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, includes $1.9 million of money
market instruments at June 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 June 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 six months ended June 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 June 30, 1997, the Partnership has made cumulative cash
distributions to the Limited Partners totaling $20,042,922. The unpaid
cumulative preferred return at June 30, 1997 totaled $19,899,554
($40.46 to $42.46 per Unit).
On July 31, 1997, the cumulative preferred return that was unpaid at
June 30, 1997, was reduced by a cash distribution to the Limited
Partners for the quarter ended June 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:
Year Ending
December 31,
------------
1997 (6 months) $ 340,816
1998 728,892
1999 11,453,661
2000 531,390
2001 573,192
2002 618,284
===========
<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.
Minimum total annual future rental payments receivable under the
noncancelable operating leases for the properties as of June 30, 1997,
follow:
Year Ending
December 31, Amount
------------ ------
1997 (6 months) $ 3,045,957
1998 6,147,049
1999 6,185,663
2000 6,259,365
2001 6,311,116
2002 6,299,410
Thereafter 42,798,092
------------
$ 77,046,652
============
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 June 30, 1997, a
property management fee of $26,581 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 June 30, 1997, the Partnership has made cumulative cash distributions to
the Limited Partners totaling $20,042,922. The unpaid cumulative preferred
return at June 30, 1997 totaled $19,899,554 (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 it's Partnership
Agreement.
<PAGE> 10
Results of Operations
The results of operations for the quarter and six months ended June 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 and six months ended June 30, 1997, decreased
$224,185 and $227,031 from the same periods in 1996. Rental revenues for the
quarter and six months ended June 30, 1997, did not materially change from the
same periods in 1996. Interest and other income for the quarter and six months
ended June 30, 1997, decreased $296,384 and $258,238 from the same periods in
1996. The decrease is due to MUSTFA (Michigan Underground Storage Tank Financial
Assurance Fund) reimbursements received and gain from the sale of the NCS
stocks, both in 1996.
Total expenses for the quarter and six months ended June 30, 1997, increased
$138,336 and $230,553 from the same periods in 1996. The increase is due to an
increase in interest and general and administrative expenses. General and
administrative expenses for the quarter and six months ended June 30, 1997,
increased $100,237 and $156,262 from the same periods in 1996, primarily due to
property appraisals incurred in 1997.
Net income for the quarter and six months ended June 30, 1997, decreased
$362,521 and $457,584 from the same periods 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 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 has no effect on the Partnership's
net income per unit for the quarter and six months ended June 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 Financial Data Schedule
(b) Reports on form 8-K filed during the quarter ended June 30, 1997.
Acquisition of the Westland, Michigan Property dated June 24, 1997.
<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: August 14, 1997 By: /s/ 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 SIX MONTHS ENDED JUNE 30, 1997 AND BALANCE
SHEET AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,962,431
<SECURITIES> 0
<RECEIVABLES> 1,944,953
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 57,513,533
<DEPRECIATION> (6,695,098)
<TOTAL-ASSETS> 55,218,694
<CURRENT-LIABILITIES> 0
<BONDS> 22,446,622
0
0
<COMMON> 0
<OTHER-SE> 32,433,585
<TOTAL-LIABILITY-AND-EQUITY> 55,218,694
<SALES> 0
<TOTAL-REVENUES> 2,786,537
<CGS> 0
<TOTAL-COSTS> 503,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 832,972
<INCOME-PRETAX> 1,133,117
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,133,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,133,117
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
