<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee required]
For the fiscal year ended December 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 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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
/X/
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. There is no active public market for the units of limited
partnership interests issued by the Registrant.
Not Applicable.
Page 1 of 37
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
None.
2
<PAGE> 3
PART I.
Forward Looking Statements
When used in this Form 10-K Report, the words "believes", "expects", "estimates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially. In particular, among the factors that could
cause actual results to differ materially are continued qualification as a real
estate partnership, general business and economic conditions, competition,
increases in real estate construction costs, interest rates, accessibility of
debt and equity capital markets and other risks inherent in the real estate
business including tenant defaults, potential liability relating to
environmental matters and illiquidity of real estate investments. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Partnership undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
The registrant, Net 2 L.P. (the "Partnership") is a limited partnership formed
on November 9, 1988 under the Uniform Limited Partnership Act of the State of
Delaware for the purpose of investing primarily in existing commercial
properties triple net leased to corporations or other entities. The Partnership
Agreement was restated and amended on June 13, 1994, which enables the
Partnership to make additional real estate investments.
The General Partner of the Partnership is Lepercq Net 2 L.P., a Delaware limited
partnership (the "General Partner"). Lepercq Net 2 Inc. is the general partner
of the General Partner. The directors and executive officers of Lepercq Net 2
Inc. are discussed in PART III, Item 10 (Directors and Executive Officers of the
Registrant). Leased Properties Management, Inc., an affiliate of Lepercq Net 2
Inc., performs certain property management services in connection with the
operation of the Partnership's business.
The Partnership commenced an offering to the public of 500,000 units at $100 per
unit of limited partnership interests (the "Units") on January 10, 1989 pursuant
to the Prospectus. On July 19, 1990, the Partnership held the final admission of
Limited Partners, and the offering was terminated after a total of 477,417 units
had been sold, equaling $47,741,700 in capital contributions. As of December 31,
1996, the Partnership had invested approximately $46,700,000 of the proceeds of
the offering in the properties, which are described in Item 2 below.
The Partnership invests in net leased real properties (or interests therein)
located throughout the United States, which offer the potential for (i)
preservation and protection of the capital of the limited partners of the
Partnership, (ii) increase of cash distributions from operations during the term
of the Partnership, (iii) tax benefits so that a portion of the cash
distributions is sheltered from current income taxation, and (iv) appreciation
in value of the Partnership's investments.
Investments are made in various types of commercial real properties and
interests therein. Such investments may include, but are not limited to: fitness
centers, warehouses, distribution centers, office buildings, retail stores,
hotels, motels, nursing homes and congregate care facilities. The Partnership
will not invest in restaurant properties. Investments are not restricted as to
specific geographical areas; however, all of the Partnership's investments are
within the United States. The Partnership acquired its original portfolio of
properties without acquisition financing, but it borrowed an amount through a
closing loan sufficient to pay all or a portion of the Partnership's
organization, offering and acquisition expenses. The real estate investments
made during 1994 and 1995 were acquired with acquisition financing and cash
balances.
3
<PAGE> 4
The Partnership attempts to negotiate provisions in its leases which will
provide that all the risks of such matters as fitness for use or purpose, design
or condition, quality of material or workmanship, latent or patent defects, the
Partnership's title, value, compliance with specifications, location, use,
merchantability, quality, description, durability or operation are borne by the
lessees. However, competitive conditions may require that the Partnership accept
certain risks, in which case it will attempt to arrange adequate insurance, if
available at reasonable cost.
Each of the following properties (as hereinafter defined) accounted for 10% or
more of consolidated rental revenues for the years ended December 31:
Property 1996 1995 1994
-------- ---- ---- ----
Tranzonic 15% 16% 19%
Michigan 16% 21% 20%
Washington 20% 19% 21%
Texas 13% 11% 13%
At December 31, 1996, the Tranzonic Properties accounted for 12%, the Michigan
Properties accounted for 16%, the Washington Property accounted for 14%, and the
Texas Properties accounted for 9% of total assets.
The Partnership attempts to maintain a working capital cash reserve equal to
1.5% of the gross proceeds of the offering, which cash reserve 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 cash requirements of the Partnership, additional
funds may be obtained through short-term or permanent loans or by reducing
distributions to limited partners.
The Partnership operates in one industry segment, investment in net leased real
property.
Competition
The real estate business is highly competitive and the Partnership competes with
numerous established companies having significantly greater resources and
experience. Competition may also come from other partnerships that have been or
may be formed by the General Partner or its affiliates.
Employees
The Partnership has no employees. All necessary personnel are provided by the
General Partner or its affiliates or agents. See Item 10, "Directors and
Executive Officers of the Registrant" and Item 13, "Certain Relationships and
Related Transactions."
4
<PAGE> 5
ITEM 2. PROPERTIES
On February 28, 1989, the Partnership acquired an office/warehouse facility
located in Highland Heights, Ohio (the "Ohio Property") and an office/warehouse
facility located in Tempe, Arizona (the "Arizona Property") (subsequently
referred to herein as the "Tranzonic Properties") from an unrelated third party
for a purchase price of $6,960,000.
The Tranzonic Properties are leased to the Tranzonic Companies, a publicly held
corporation that manufactures and distributes disposable and household products.
The two leases each have a base term expiring on March 1, 2009, with two
optional ten-year renewal terms. The rent payable under the leases increases
every 30 months during the base term and during each option period by the
increase in the Consumer Price Index ("CPI") over the preceding 30-month period,
not to exceed 4.5% annually during the initial 30-month period and 3.5% annually
thereafter.
During 1989, the Partnership acquired 13 retail stores located in Michigan (the
"Michigan Properties") from an unrelated third party for an aggregate purchase
price of $8,317,250.
The Michigan Properties were leased to Action Auto Stores, Inc. ("Action Auto"),
a publicly held corporation that operated a chain of specialty retail stores
carrying brand name automotive parts and accessories. On June 15, 1990 Action
Auto filed a petition for relief under Chapter 11 of the United States Code (the
"Bankruptcy Code'") with the United States Bankruptcy Court (the "Bankruptcy
Court"). In February 1991, Action Auto rejected the leases for all 13 Michigan
Properties and such properties were surrendered to the Partnership.
In 1991, the Partnership entered into a lease agreement with Total Petroleum,
Inc. for the Michigan Properties. The base term of the lease is 20 years
commencing June 1, 1991. Through 1995, the net rental rate was $681,183 per
annum; thereafter, the net rents are increasing at a rate of 3% per year. The
Partnership has indemnified the lessee for up to approximately $3,600,000 of
costs associated with environmental damages.
On March 5, 1990, the Partnership acquired a warehouse and manufacturing
facility located in Earth City, Missouri (the "Missouri Property") from an
unrelated third party for a purchase price of $6,343,670.
The Missouri Property was leased to Consolidated Packaging Corporation ("CPC").
CPC did not fulfill its responsibilities under the terms of the lease and on
February 14, 1991, the lease was terminated. On May 24, 1991, CPC filed a
petition for relief in the United States Bankruptcy Court under Chapter 11 of
the Bankruptcy Code. On January 9, 1992, CPC surrendered the property back to
the Partnership.
On March 19, 1992, the Partnership entered into a lease agreement for the
Missouri Property with Everest & Jennings, Inc. ("Everest & Jennings") for a
period of ten years. The net rental is $279,300 annually ($1.90 per square foot)
in years 1 to 5 and $323,400 annually ($2.20 per square foot) in years 6 to 10.
The term of the lease commenced on May 18, 1992. Everest & Jennings had the
right to purchase the property from the Partnership within 30 days of the third
anniversary of the lease for $3,700,000 but declined to exercise the option to
purchase the property and the option period expired.
On March 30, 1990, the Partnership acquired an interest in an office/school
facility located in Seattle, Washington (the "Washington Property") from an
unrelated third party for a purchase price of $8,000,000.
5
<PAGE> 6
The Washington Property is leased to the Art Institute of Seattle, a wholly
owned subsidiary of EMC Holdings, Inc. ("EMC"). EMC operates, as subsidiaries,
eight art institutes which offer training programs leading to associate degrees
in various art and design related fields. EMC is the single largest source of
entry-level commercial artists in the United States. The lease has a 15-year
base term expiring on June 30, 2005, with two optional ten-year renewal terms.
On June 19, 1990, the Partnership acquired 16 convenience-type grocery stores
located in Texas (the "Texas Properties") from an unrelated third party for an
aggregate purchase price of $6,705,138.
The Texas Properties are leased to National Convenience Stores Incorporated
("NCS"), one of the largest operators of convenience-type grocery stores in the
United States. On December 9, 1991, NCS filed a petition for relief under the
Bankruptcy Code and subsequently, rejected three of the leases for the Texas
Properties.
The Partnership filed a proof of claim against NCS for approximately $263,000
for pre-petition rent, lost rent, and certain expenses. From 1993 to 1996, the
Partnership received a total of 7,894 shares of National Convenience Stores,
Inc. common stock in partial settlement of such claim. In December 1995, Diamond
Shamrock acquired NCS. As a result of the acquisition, the Partnership received
proceeds of $213,138 in consideration of its shares.
Effective May 1991, one of the rejected leases was assigned to Diamond Shamrock
Corporation ("Diamond Shamrock"). The lease requires Diamond Shamrock to pay all
taxes, assessments, insurance, utility charges, costs of maintenance and
repairs, and all other charges and expenses relating to the property and its use
and occupancy. The base term of the lease expires on June 19, 2010 and has three
seven-year renewal options. On November 1, 1992, 13 of the leases were affirmed
by NCS, subject to amended terms. The amended terms of the leases include a new
base term of 20 years and two months with three seven-year renewal options and a
reduction in the annual net rent for seven of the locations. The remaining two
properties were sold.
On September 14, 1990, the Partnership acquired an industrial facility (the
"Ameritech Property") located in Columbus, Ohio, from an unrelated third party
for a purchase price of $2,315,000.
The Ameritech Property is leased to Ameritech Services, Inc., a wholly owned
subsidiary of American Information Technologies Corporation, which operates in
the telecommunications industry as a telephone service, directory publisher, and
a mobile cellular service and equipment lessor. The lease has a 15-year base
term expiring on August 10, 2005.
On September 28, 1990, the Partnership acquired fee title to an office facility
(the "Tucson Property") located in Tucson, Arizona from an unrelated third party
for a purchase price of $1,625,000.
The Tucson Property is leased to RCS of Tucson, a subsidiary of Intermedia
Partners, an Arizona limited partnership. Intermedia Partners operates cable
television systems nationwide. The lease has a 20-year base term expiring on
September 30, 2010.
On June 22, 1994, the Partnership acquired a retail facility located in Eau
Claire, Wisconsin from an unrelated third party for a total acquisition cost of
approximately $4,187,000. The net purchase price of $4,160,000 was satisfied by
a cash payment of $1,040,000 and financing secured by a first mortgage loan in
the amount of $3,120,000. The loan has a 20-year term with an interest rate of
8% per annum. The property is net leased to Kohl's Department Stores, Inc. The
lease has a 20-year base term expiring on June 30, 2014 with four optional
five-year renewal terms.
6
<PAGE> 7
On December 23, 1994, the Partnership acquired an office/distribution facility
located in Milford, Connecticut from an unrelated third party for cash of
approximately $2,950,000. The property is net leased to A-Copy, Inc., a division
of Alco Standard Corporation. The lease has a 10-year base term expiring on
December 31, 2004 with four optional five-year renewal terms.
On September 21, 1995, the Partnership acquired an office, engineering, research
and development facility, located at 250 Turnpike Road, Southborough,
Massachusetts from an unrelated third party for a cash purchase price of $4.1
million. Related acquisition fees of $66,360 were incurred, of which $41,000 was
paid to affiliates of the General Partner. The Property is leased to Duracraft
Corporation. The lease has a 20-year base term expiring on September 30, 2015,
with four optional five-year renewal terms. On April 2, 1996, the Partnership
received financing secured by a $2.8 million mortgage note on the Massachusetts
Property. The note has a 232-month term with an interest rate of 7.5 % per
annum. Monthly payments of principal and interest in the amount of $22,895 are
due on the first day of each month commencing on June 1, 1996.
7
<PAGE> 8
Minimum future rental payments receivable under the leases during the base
terms for the properties owned by the Partnership at December 31, 1996, follow:
<TABLE>
<CAPTION>
Total Everest & Diamond
Year Total Tranzonic Petroleum Jennings AIS NCS Shamrock Ameritech Intermedia
- ---- ----- --------- --------- -------- --- --- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $ 5,230,681 856,785 757,373 286,650 1,069,992 492,265 60,701 245,000 299,690
1998 5,304,920 856,785 780,094 323,400 1,069,992 507,033 60,701 245,000 299,690
1999 5,343,534 856,785 803,497 323,400 1,069,992 522,244 60,701 245,000 299,690
2000 5,417,236 856,785 827,602 323,400 1,069,992 537,911 67,321 250,833 299,690
2001 5,468,987 856,785 852,430 323,400 1,069,992 554,049 73,941 255,000 299,690
2002 5,457,281 856,785 878,003 269,500 1,069,992 570,670 73,941 255,000 299,690
2003 5,231,241 856,785 904,343 1,069,992 587,790 73,941 255,000 299,690
2004 5,292,872 856,785 931,473 1,069,992 605,424 73,941 255,000 299,690
2005 4,338,189 856,785 959,418 534,996 623,587 76,938 106,250 299,690
2006 3,747,430 856,785 988,200 642,294 79,936 299,690
2007 3,796,345 856,785 1,017,846 661,563 79,936 299,690
2008 3,846,727 856,785 1,048,381 681,410 79,936 299,690
2009 3,184,632 142,797 1,079,832 701,852 79,936 299,690
2010 2,980,396 1,112,227 722,908 39,968 224,768
2011 2,094,241 469,121 744,595
2012 1,647,458 766,933
2013 880,525
2014 646,263
2015 309,000
----------- ---------- --------- --------- --------- --------- ------- --------- ---------
Total $70,217,958 10,424,217 13,409,840 1,849,750 9,094,932 9,922,528 981,838 2,112,085 4,120,738
=========== ========== ========== ========= ========= ========= ======= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Kohl's
Dept.
Year Store A-Copy Duracraft
- ---- ----- ------ ---------
<S> <C> <C> <C>
1997 434,791 315,434 412,000
1998 434,791 315,434 412,000
1999 434,791 315,434 412,000
2000 434,791 336,909 412,000
2001 434,791 336,909 412,000
2002 434,791 336,909 412,000
2003 434,791 336,909 412,000
2004 451,659 336,909 412,000
2005 468,525 412,000
2006 468,525 412,000
2007 468,525 412,000
2008 468,525 412,000
2009 468,525 412,000
2010 468,525 412,000
2011 468,525 412,000
2012 468,525 412,000
2013 468,525 412,000
2014 234,263 412,000
2015 309,000
---------- --------- ---------
Total $7,946,183 2,630,847 7,725,000
========== ========= =========
</TABLE>
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
Neither the Partnership nor its properties are subject to any pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1996 to a vote of Unit holders.
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<PAGE> 10
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
An established public trading market for the Units does not exist, and it is not
anticipated that such a market will develop in the near future. Further, the
transfer of Units is subject to substantial restrictions. Accordingly,
information as to the market value of a Unit at any given date is not available.
As of December 31, 1996, there were 2,329 investors holding 477,167 limited
partnership units.
The Partnership is a limited partnership and, accordingly, does not pay
dividends. However, the Partnership makes quarterly cash distributions. As of
December 31, 1996, the Partnership has made cumulative cash distributions
amounting to $18,850,004 to the Limited Partners and $384,698 to the General
Partner. (See Note 3 of Notes to Financial Statements.)
10
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of selected financial data for the
Partnership for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rental revenue $ 5,442,166 $ 5,146,266 $ 4,269,071 $ 4,079,776 $ 4,132,274
=========== =========== =========== =========== ===========
Income before
extraordinary item $ 2,308,182 $ 2,277,409 $ 1,895,159 $ 618,569 $ 1,293,130
=========== =========== =========== ========== ===========
Income before extraordinary
item per Unit of
partnership interest (*) $ 4.02 to $ 3.87 to $ 3.10 to $ 0.96 to $ 1.83 to
5.23 5.23 4.43 1.48 3.22
=========== =========== =========== =========== ===========
Extraordinary item $ -- $ -- $ 1,913,379 $ -- $ --
=========== =========== =========== =========== ===========
Extraordinary item per Unit
of limited partnership
interest (*) $ -- $ -- $ 3.13 to $ -- $ --
-- -- 4.48 -- --
=========== =========== =========== =========== ===========
Net income $ 2,308,182 $ 2,277,409 $ 3,808,538 $ 618,569 $ 1,293,130
=========== =========== =========== =========== ===========
Net income per Unit of
limited partnership
interests (*) $ 4.02 to $ 3.87 to $ 6.23 to $ 0.96 to $ 1.83 to
5.23 5.23 8.91 1.48 3.22
=========== =========== =========== =========== ===========
Total assets $ 50,001,798 $ 47,658,335 $ 48,234,442 $ 42,639,462 $ 44,545,631
=========== =========== =========== =========== ===========
Mortgage notes payable and
closing loan payable (including
accrued interest added to
principal) $ 17,181,091 $ 14,721,188 $ 14,994,200 $ 10,668,044 $ 9,865,587
=========== =========== =========== =========== ===========
Cash distributions per Unit
of limited partnership
interests $ 5.00 $ 5.00 $ 5.00 $ 5.30 $ 5.40
=========== =========== =========== =========== ===========
</TABLE>
(*) Amounts allocated to and received by unit holders vary depending on the
dates they became unit holders.
The above financial data should be read in conjunction with the Financial
Statements and the related notes appearing elsewhere in this report.
11
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
On January 10, 1989, the Partnership commenced the sale of up to 500,000 Units
of limited partnership interests at $100 per Unit with the option to offer an
additional 500,000 Units. As of July 19, 1990, the Partnership had raised a
total of $47,741,700 in capital contributions (477,417 Units) and the offering
was terminated. As of December 31, 1996, the net offering proceeds consisting of
aggregate gross offering proceeds of $47,741,700 less related offering costs of
$5,691,271 along with the proceeds from the closing loan, bridge financing and
mortgage debt, have been utilized by the Partnership to invest in triple net
leased real estate properties (or interests therein), to pay for related
property acquisition expenses, financing and acquisition fees and to provide for
a working capital reserve.
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.
On April 2, 1996, the Partnership received financing secured by a $2.8 million
mortgage note on the Massachusetts Property. The note has a 232-month term with
an interest rate of 7.5 % per annum. Monthly payments of principal and interest
in the amount of $22,895 are due on the first day of each month commencing on
June 1, 1996.
As of December 31, 1996, the Partnership has made cumulative cash distributions
to the Limited Partners totaling $18,850,004. The unpaid cumulative preferred
return at December 31, 1996 totaled $18,468,053 (see Note 3 of Notes to
Financial Statements).
There are no material restrictions (other than the property conditions discussed
above and the debt service requirements) upon the Partnership's present ability
to make distributions in accordance with the provisions of its Partnership
Agreement.
12
<PAGE> 13
Results of Operations
The results of operations for the years ended December 31, 1996, 1995 and 1994
are primarily attributable to the acquisition and operations of the real
property investments as described in Item 2.
Revenues for the year ended December 31, 1996 did not materially change from
1995. Revenues for the year ended December 31, 1995 increased $1,016,255 from
1994, due to the increase in rental revenue from leases on property acquisitions
that occurred during 1994 and 1995.
Total expenses for the years 1995 and 1994 did not materially change. Interest
expense for the year ended December 31, 1996 did not materially change from
1995. Interest expense for the year ended December 31, 1995 increased $336,464
from 1994, due to financing secured by a $12 million mortgage note. General and
administrative expenses for the year ended December 31, 1996 increased $199,590
from 1995, due to increases in property operating expenses, including
appraisals. General and administrative expenses for the year ended December 31,
1995 decreased $234,538 from 1994 due to non-recurring fees incurred in 1994 in
connection with the refinancing of the closing loan.
Net income for the year ended December 31, 1996, did not materially change from
1995. Net income for the year ended December 31, 1995 decreased $1,531,129 from
1994. The decrease was primarily due to the settlement of the closing loan at a
discount and the gain from the sale of the Oregon Property that occurred in
1994.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NET 2 L.P.
INDEX
Page
----
Independent Auditors' Report 15
Balance Sheets at December 31, 1996 and 1995 16
Statements of Income for the years ended December 31, 1996,
1995 and 1994 17
Statements of Changes in Partners' Capital (Deficit) for the years
ended December 31, 1996, 1995 and 1994 18
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 19
Notes to Financial Statements 20-29
Financial Statement Schedule*
Real Estate and Accumulated Depreciation Schedule III 30
- ----------
* All other schedules have been omitted because the required information is
not applicable or the information is shown in the financial statements or
the notes thereto.
14
<PAGE> 15
Independent Auditors' Report
The Partners
Net 2 L.P.:
We have audited the financial statements of Net 2 L.P. as listed in the
accompanying index. In connection with our audits of the financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These financial statements and the financial statement
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Net 2 L.P. as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
New York, New York
March 6, 1997
15
<PAGE> 16
NET 2 L.P.
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS 1996 1995
---- ----
Real estate, at cost (notes 4 and 5):
Buildings $40,122,562 40,405,663
Land 9,487,396 9,487,396
----------- -----------
49,609,958 49,893,059
Less: accumulated depreciation 6,192,044 5,481,337
----------- -----------
43,417,914 44,411,722
Cash and cash equivalents 4,124,659 733,135
Restricted cash 100,000 88,677
Deferred expenses, net of accumulated
amortization of $447,921 and $441,068
in 1996 and 1995, respectively 513,367 590,602
Rent receivable 1,816,481 1,535,664
Other assets 29,377 298,535
----------- -----------
$50,001,798 47,658,335
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable (notes 4 and 5) 17,181,091 14,721,188
Accrued interest payable (note 5) 99,786 106,119
Accounts payable and accrued liabilities 203,190 186,953
----------- -----------
17,484,067 15,014,260
----------- -----------
Commitments and contingencies (note 4)
Partners' capital (note 3):
General Partner (363,040) (360,513)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 32,880,771 33,004,588
----------- -----------
Total partners' capital 32,517,731 32,644,075
----------- -----------
$50,001,798 47,658,335
=========== ===========
See accompanying notes to financial statements.
16
<PAGE> 17
NET 2 L.P.
STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Revenues:
Rental (notes 4 and 6) $5,442,166 5,146,266 4,269,071
Interest 146,490 200,800 190,364
Other 324,551 283,418 154,794
---------- ---------- ----------
5,913,207 5,630,484 4,614,229
---------- ---------- ----------
Expenses:
Interest (note 5) 1,568,072 1,500,930 1,164,466
Depreciation 993,808 994,263 1,001,355
Amortization of
deferred expenses 143,258 170,454 161,263
General, administrative
and other (note 7) 899,887 700,297 934,835
---------- ---------- ----------
3,605,025 3,365,944 3,261,919
---------- ---------- ----------
Income before gain from sale
of properties
and extraordinary item 2,308,182 2,264,540 1,352,310
Gain from sale of properties,
net (note 4) -- 12,869 542,849
---------- ---------- ----------
Income before extraordinary item 2,308,182 2,277,409 1,895,159
Gain on settlement of long-term
closing loan, net (note 5) -- -- 1,913,379
---------- ---------- ----------
Net income $2,308,182 2,277,409 3,808,538
========== ========== ==========
Income before extraordinary
item per Unit of limited
partnership interest (*) $4.02 to 5.23 3.87 to 5.23 3.10 to 4.43
============= ============ ============
Extraordinary item per Unit of
limited partnership interest (*) $ -- -- 3.13 to 4.48
============= ============ ============
Net income per Unit of limited
partnership interest (*) $4.02 to 5.23 3.87 to 5.23 6.23 to 8.91
============= ============ ============
(*) Amounts allocated to received by unit holders vary depending on the dates
they became unit holders.
See accompanying notes to financial statements.
17
<PAGE> 18
NET 2 L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
Years ended December 31, 1996, 1995 and 1994
General Limited
Total Partner Partners
----- ------- --------
Partners' capital (deficit)
at December 31, 1993 $ 31,427,180 (384,850) 31,812,030
Net income 3,808,538 76,171 3,732,367
Cash distributions (2,434,526) (48,691) (2,385,835)
------------ ------------ ------------
Partners' capital (deficit)
at December 31, 1994 32,801,192 (357,370) 33,158,562
Net income 2,277,409 45,548 2,231,861
Cash distributions (2,434,526) (48,691) (2,385,835)
------------ ------------ ------------
Partners' capital (deficit)
at December 31, 1995 32,644,075 (360,513) 33,004,588
Net income 2,308,182 46,164 2,262,018
Cash distributions (2,434,526) (48,691) (2,385,835)
------------ ------------ ------------
Partners' capital (deficit)
at December 31, 1996 $ 32,517,731 (363,040) 32,880,771
============ ============ ============
See accompanying notes to financial statements.
18
<PAGE> 19
NET 2 L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,308,182 2,277,409 3,808,538
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,137,066 1,164,717 1,162,618
Increase in rents receivable, net (280,817) (405,390) (163,006)
Gain on sale of properties, net -- (12,869) (542,849)
Gain on settlement of long-term
closing loan, net -- -- (1,913,379)
Decrease in security deposits -- (186,582) --
Decrease (increase) in other assets 269,158 (223,382) 220,163
(Decrease) increase in accrued
interest payable (6,333) (2,177) 10,637
Increase (decrease) in accounts
payable and other liabilities 16,237 42,781 (115,825)
----------- ----------- -----------
Total adjustments 1,135,311 377,098 (1,341,641)
----------- ----------- -----------
Net cash provided by operating
activities 3,443,493 2,654,507 2,466,897
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of properties -- 144,984 4,355,938
Investments in real estate -- (4,166,360) (7,136,128)
----------- ----------- -----------
Net cash used in investing activities -- (4,021,376) (2,780,190)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds of mortgage notes payable 2,800,000 -- 15,120,000
Principal payments on mortgage notes (340,097) (273,012) (125,800)
Increase in deferred expenses (66,023) -- (775,629)
Repayment of closing loan -- -- (8,534,435)
(Increase) decrease in restricted cash (11,323) 3,103,500 (3,192,177)
Cash distributions to partners (2,434,526) (2,434,526) (2,434,526)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (51,969) 395,962 57,433
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 3,391,524 (970,907) (255,860)
Cash and cash equivalents at beginning of year 733,135 1,704,042 1,959,902
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,124,659 733,135 1,704,042
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,574,405 1,503,107 1,153,829
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE> 20
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
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 to invest in real
estate properties or interests therein net leased to corporations or other
entities.
On January 10, 1989, the Partnership commenced the sale of up to 500,000
Units with the option to offer an additional 500,000 Units at $100 per
Unit. On July 19, 1990, the Partnership held the final admission of Limited
Partners, and the offering was terminated after a total of 477,417 Units
had been sold to 2,396 investors, equaling $47,741,700 in capital
contributions.
As of December 31, 1996, there were 2,329 investors holding 477,167 limited
partnership units.
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. On January 1,
1996, the Partnership adopted Statement of Financial Accounting Standards
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 Partnership's results of operations or its
financial condition for the year ended December 31, 1996. Acquisition fees
incurred in connection with the properties acquired have been capitalized
as a cost of the property. 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 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 $4.098 million of money market
instruments at December 31, 1996.
Deferred expenses are comprised of loan fees which are amortized using the
straight-line method over the term of the loan and organization costs which
are being amortized over a period of 60 months.
The Partnership uses the accrual basis of accounting for Federal income tax
purposes. No provision for income taxes has been made as the liability for
any such taxes is that of the partners rather than the Partnership.
(Continued)
20
<PAGE> 21
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
2., Continued
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 December 31, 1996 and 1995, rent receivable
primarily consists of amounts for the excess of rental revenues recognized
on a straight-line basis over the rents collectible under the leases.
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 for each of the years ended
December 31, 1996, 1995 and 1994.
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 considered to be financial
instruments and are carried at cost, which approximates fair value.
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
Pursuant to the terms of the Partnership Agreement, the General Partner is
liable for all general obligations of the Partnership to the extent not
paid by the Partnership. The Limited Partners are and will not be liable
for the debts of the Partnership beyond their contributed capital.
Distributable cash from operations, as defined in the Partnership
Agreement, is generally to be distributed 98% to the Limited Partners and
2% to the General Partner until each limited partner has received total
distributions from operations equal to an 11% cumulative non-compounded
preferred return. Thereafter, such distributions are to be made 90% to the
Limited Partners and 10% to the General Partner.
Distributable cash from capital transactions, as defined, is generally to
be distributed 99% to the Limited Partners and 1% to the General Partner
until each limited partner has received total distributions from capital
transactions equal to an 11% cumulative non-compounded preferred return
plus a return of its capital contribution. Thereafter, such distributions
are to be made 85% to the Limited Partners and 15% to the General Partner.
For financial reporting purposes, all items of income are allocated in the
same proportion as distributions of distributable cash.
(Continued)
21
<PAGE> 22
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
3., Continued
Distributable cash attributed to a particular limited partner's Unit is
calculated from the date of admission to the Partnership. As of December
31, 1996, the Partnership has made total cumulative cash distributions to
the Limited Partners totaling $18,850,004 ($43.62 to $33.52 per Unit, per
close). The unpaid cumulative preferred return at December 31, 1996 totaled
$18,468,053 ($39.40 to $37.46 per Unit, per close).
Cash distributions paid per Unit of limited partnership interest for each
of the years in the three-year period ended December 31, 1996 was $5.00.
On January 31, 1997, the cumulative preferred return that was unpaid at
December 31, 1996 was reduced by a cash distribution to the Limited
Partners for the quarter ended December 31, 1996 totaling $596,459 ($1.25
per unit).
The Partnership Agreement was restated and amended on June 13, 1994, which
enables the Partnership to make additional real estate investments.
Taxable income, as defined, before depreciation, generally is allocated in
the same proportion as distributions of distributable cash or proceeds from
capital transactions (other than the portion of such proceeds constituting
a return of capital). Depreciation and amortization expense, to the extent
that it does not exceed income before depreciation for such year, shall be
allocated in the same ratio as taxable income. Any excess of such
depreciation deductions shall be allocated 98% to the Limited Partners and
2% to the General Partner. For financial reporting purposes, all items of
income are allocated in the same proportion as distributions of
distributable cash or proceeds from capital transactions.
4. Investments in Real Estate
On February 28, 1989, the Partnership acquired an office/warehouse facility
located in Highland Heights, Ohio (the "Ohio Property") and an
office/warehouse facility located in Tempe, Arizona (the "Arizona
Property") (subsequently referred to herein as the "Tranzonic Properties")
from an unrelated third party for a purchase price of $6,960,000 and paid
related acquisition fees of $358,760 to an affiliate of the General
Partner.
The Tranzonic Properties are leased to the Tranzonic Companies, a publicly
held corporation that manufactures and distributes disposable and household
products. The two leases each have a base term expiring on March 1, 2009,
with two optional ten-year renewal terms. The rent payable under the leases
increases every 30 months during the base term and during each option
period by the increase, if any, in the Consumer Price Index ("CPI") over
the preceding 30-month period, not to exceed 4.5% annually during the
initial 30-month period and 3.5% annually thereafter.
During 1989, the Partnership acquired 13 retail stores located in Michigan
(the "Michigan Properties") from an unrelated third party for an aggregate
purchase price of $8,317,250 and paid related acquisition fees of $428,721
to affiliates of the General Partner.
(Continued)
22
<PAGE> 23
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
4., Continued
The Michigan Properties were leased to Action Auto Stores, Inc. ("Action
Auto"), a publicly held corporation that operated a chain of specialty
retail stores carrying brand name automotive parts and accessories. On June
15, 1990, Action Auto filed a petition for relief under Chapter 11 of the
United States Code (the "Bankruptcy Code") with the United States
Bankruptcy Court (the "Bankruptcy Court").
In February 1991, Action Auto rejected the leases for the 13 properties and
such properties were surrendered to the Partnership. After the properties
were vacated, the General Partner has commenced a series of investigations
to determine whether Action Auto has complied with the environmental
provisions of the leases. The Partnership incurs costs relating to
environmental investigation and remediation related to the properties. If
the cost exceeds $10,000 for any one property, the Partnership applies for
reimbursements in excess of $10,000 to the Michigan Underground Storage
Tank Financial Assurance Fund ("MUSTFA"). All claims are subject to
approval by MUSTFA. These costs are not expected to have a material impact
on the financial position or results of operations of the Partnership. The
Partnership has received partial reimbursement of such costs.
On June 1, 1991, the Partnership entered into a lease agreement with Total
Petroleum, Inc. for the Michigan Properties. The 20-year base term of this
lease commenced on June 1, 1991. Through 1995, the net rental rate was
$681,183 per annum; thereafter the net rents are increasing at a rate of 3%
per year. The Partnership has indemnified the lessee for up to
approximately $3,600,000 of costs associated with environmental damages.
In November 1989, the Partnership acquired an industrial warehouse, office
and processing facility located in Beaverton, Oregon (the "Oregon
Property") for a purchase price of $3,747,500. The Oregon Property was
leased to Frito-Lay Corporation, a wholly owned subsidiary of PepsiCo Inc.
The lease commenced on February 1, 1979. On July 27, 1994, the Partnership
sold the Beaverton, Oregon property to Frito-Lay, Inc. for net proceeds of
$4,206,819. The Partnership realized a gain of $558,730 on the sale of the
property.
On March 5, 1990, the Partnership acquired a warehouse and manufacturing
facility located in Earth City, Missouri (the "Missouri Property") from an
unrelated third party for a purchase price of $6,343,670. Related
acquisition fees of $333,043 were paid to affiliates of the General
Partner.
(Continued)
23
<PAGE> 24
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
4., Continued
The Missouri Property was leased to Consolidated Packaging Corporation
("CPC"). CPC did not fulfill its responsibilities under the terms of the
lease and on February 14, 1991, the lease was terminated. On May 24, 1991,
CPC filed a petition for relief in the United States Bankruptcy Court under
Chapter 11 of the Bankruptcy Code. On January 9, 1992, CPC surrendered the
property back to the Partnership.
On March 19, 1992, the Partnership entered into a lease agreement with
Everest & Jennings, Inc. ("Everest & Jennings") for a period of ten years.
The net rental is $279,300 annually ($1.90 per square foot) in years 1 to 5
and $323,400 annually ($2.20 per square foot) in years 6 to 10. Everest &
Jennings had the right to purchase the property from the Partnership within
30 days of the third anniversary of the lease for $3,700,000 but declined
to exercise the option and the option period expired.
On March 30, 1990, the Partnership acquired an interest in an office/school
facility located in Seattle, Washington (the "Washington Property") from an
unrelated third party for a purchase price of $8,000,000. Related
acquisition fees of $440,000 were paid to affiliates of the General
Partner.
The Washington Property is leased to the Art Institute of Seattle, a wholly
owned subsidiary of EMC Holdings, Inc. ("EMC"). EMC operates, as
subsidiaries, eight art institutes which offer training programs leading to
associate degrees in various art- and design-related fields. The lease has
a 15-year base term expiring on June 30, 2005, with two optional 10-year
renewal terms.
On June 19, 1990, the Partnership acquired 16 convenience-type grocery
stores located in Texas (the "Texas Properties") from an unrelated third
party for an aggregate purchase price of $6,705,138. Related acquisition
fees of $533,277 were paid to affiliates of the General Partner.
The Texas Properties are leased to National Convenience Stores Incorporated
("NCS"), one of the largest operators of convenience-type grocery stores in
the United States. On December 9, 1991, NCS filed a petition for relief
under the Bankruptcy Code and subsequently, rejected three of the leases
for the Texas Properties.
The Partnership filed a proof of claim against NCS for approximately
$263,000 for pre-petition rent, lost rent, and certain expenses. From 1993
to 1996, the Partnership received a total of 7,894 shares of National
Convenience Stores, Inc. common stock in partial settlement of such claim.
In December 1995, Diamond Shamrock acquired NCS. As a result of the
acquisition, the Partnership received proceeds of $213,138 in
consideration of their shares.
(Continued)
24
<PAGE> 25
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
4., Continued
Effective May 1991, one of the rejected leases was assigned to Diamond
Shamrock Corporation ("Diamond Shamrock"). The lease requires Diamond
Shamrock to pay all taxes, assessments, insurance, utility charges, costs
of maintenance and repairs, and all other charges and expenses relating to
the property and its use and occupancy. The base term of the lease expires
on June 19, 2010 and has three seven-year renewal options. On November 1,
1992, 13 of the leases were affirmed by NCS, subject to amended terms. The
amended terms of the leases include a new base term of 20 years and two
months with three seven-year renewal options and a reduction in the annual
net rent for seven of the locations.
In April 1994 and 1995, the Partnership sold the two remaining properties
and realized a loss of $15,881 and a gain of $12,869,respectively.
On September 14, 1990, the Partnership acquired an industrial facility (the
"Ameritech Property") located in Columbus, Ohio, from an unrelated third
party for a purchase price of $2,315,000. Related acquisition fees of
$98,665 were paid to an affiliate of the General Partner.
The Ameritech Property is leased to Ameritech Services, Inc., a wholly
owned subsidiary of American Information Technologies Corporation, which
operates in the telecommunications industry as a telephone service,
directory publisher, and a mobile cellular service and equipment lessor.
The lease has a 15-year base term expiring on August 10, 2005.
On September 28, 1990, the Partnership acquired fee title to an office
facility (the "Tucson Property") located in Tucson, Arizona from an
unrelated the third party for a purchase price of $1,625,000.
The Tucson Property is leased to RCS of Tucson, a subsidiary of Intermedia
Partners, an Arizona limited partnership. Intermedia Partners operates
cable television systems nationwide. The lease has a 20-year base term
expiring on September 30, 2010. During the first two years of the lease, no
rental payments were required. Commencing in the third year of the lease,
annual rent equal to the greater of $211,788 ("Base Rent") or Base Rent
adjusted by three times the percentage increase in the Consumer Price Index
from the commencement of the lease term, but not more than $251,625 per
annum was due and payable. Rent will be paid in twelve equal monthly
installments, in advance. Base Rent will be increased periodically during
the term of the lease by three times the percentage increase in the
Consumer Price Index from the commencement of the lease term.
On June 22, 1994, the Partnership acquired a retail facility located in Eau
Claire, Wisconsin from an unrelated third party for a total acquisition
cost of approximately $4,187,000. The net purchase price of $4,160,000 was
satisfied by a cash payment of $1,040,000 and financing secured by a first
mortgage loan in the amount of $3,120,000. The loan has a 20-year term with
an interest rate of 8% per annum.
(Continued)
25
<PAGE> 26
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
4., Continued
The property is net leased to Kohl's Department Stores, Inc. The lease has
a 20-year base term expiring on June 30, 2014 with four optional five-year
renewal terms.
On December 23, 1994, the Partnership acquired an office/distribution
facility located in Milford, Connecticut from an unrelated third party for
a total acquisition cost of approximately $2,950,000, which was satisfied
by a cash payment. The property is net leased to A-Copy, Inc., a division
of Alco Standard Corporation. The lease has a 10-year base term expiring on
December 31, 2004 with four optional five-year renewal terms.
On September 21, 1995, the Partnership acquired an office, engineering,
research and development facility, located at 250 Turnpike Road,
Southborough, Massachusetts from an unrelated third party for an aggregate
purchase price of $4.1 million. Related acquisition fees of $66,360 were
incurred, of which $41,000 was paid to affiliates of the General partner.
The total acquisition cost was satisfied by a cash payment. The Property is
being leased to Duracraft Corporation. The lease has a 20-year base term
expiring on September 30, 2015, with four optional five-year renewal terms.
5. Mortgage Notes and Long-Term Closing Loan
In 1988, an agreement was entered into with a commercial bank to provide
the Partnership with a loan ("closing loan") in an amount up to $8,500,000.
In February 1992, the commercial lender which provided the closing loan was
placed in receivership by the Federal Deposit Insurance Corporation
("FDIC"). The settlement agreement with the FDIC resulted in a net gain of
$1,913,379 to the Partnership.
The Partnership obtained financing secured by a $12 million mortgage note
with interest payable at the London Interbank Offered Rate (the "LIBOR
Rate") plus 4.5% per annum, as published in the Wall Street Journal, in
effect on the first business day of each month. The interest rate at
December 31, 1996 was 10.4%. Principal payments due monthly over the 5-year
primary term are based on a 20-year, 9.5% amortization schedule. The note
matures on May 30, 1999, at which time the Partnership has the option to
extend the term pursuant to certain conditions in the mortgage note.
(Continued)
26
<PAGE> 27
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
5., Continued
The mortgage note is secured by mortgages on the Michigan Properties, the
Ohio Properties, the Missouri Property, the Washington Property, the Texas
Properties, the Tucson Property, the Connecticut Property and the Tempe
Property and by a negative declaration by the Partnership that the
Properties owned will not be mortgaged to secure any other indebtedness. If
the appraised value of the collateral falls below certain specified levels,
the Partnership will be required to provide additional security or to
prepay a portion of the loan. The mortgage note is recourse to the
Partnership but not to its Limited or General Partners. The loan may not be
prepaid before May 31, 1997, after which it may be, subject to certain
prepayment penalties, as defined.
In 1994, the Partnership acquired a retail facility located in Eau Claire,
Wisconsin with parts of the purchase price being financed by a first
mortgage loan in the amount of $3,120,000. The loan has a 20-year term with
an interest rate of 8% per annum.
On April 2, 1996, the Partnership received financing secured by a $2.8
million mortgage note on the Massachusetts Property. The note has a
232-month term with an interest rate of 7.5 % per annum. Monthly payments
of principal and interest in the amount of $22,895 are due on the first day
of each month commencing on June 1, 1996. The note may be prepaid at any
time subject to certain prepayment penalties, as defined.
Principal paydowns of the mortgage notes payable for the succeeding five
years are as follows:
Year ending December 31 Amount
----------------------- ------
1997 $ 398,211
1998 435,258
1999 11,137,232
2000 190,395
2001 205,724
=============
27
<PAGE> 28
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
6. Leases
Minimum future rental payments receivable under noncancelable operating
leases for the properties as of December 31, 1996 are as follows:
Year ending December 31 Amount
----------------------- ------
1997 $ 5,230,681
1998 5,304,920
1999 5,343,534
2000 5,417,236
2001 5,468,987
Thereafter 43,452,600
--------------
$ 70,217,958
==============
The leases are 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.
Each of the following properties (as defined) accounted for 10% or more of
consolidated rental revenues for the years ended December 31:
Property 1996 1995 1994
-------- ---- ---- ----
Tranzonic 15% 16% 19%
Michigan 16% 21% 20%
Washington 20% 19% 21%
Texas 13% 11% 13%
At December 31, 1996, the Tranzonic Properties accounted for 12%, the
Michigan Properties accounted for 16%, the Washington Property accounted
for 14%, and the Texas Properties accounted for 9% of total net assets.
28
<PAGE> 29
NET 2 L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
7. Related Parties
LCP Group, an affiliate of the General Partner, received acquisition fees
of $41,000 for the year ended December 31, 1995.
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). At December 31, 1996, 1995, and 1994, a property
management fee of approximately $52,000 , $47,000 and $41,500,
respectively, had been paid or accrued to Leased Properties Management,
Inc., representing cumulative fees for the years then ended. In addition,
the Partnership has reimbursed LCP for various general and administrative
costs incurred on behalf of the Partnership of approximately $80,000,
$77,900 and $68,500 in 1996, 1995 and 1994, respectively. On October 1,
1996, LCP Group assigned its rights to Lexington Corporate Properties, Inc.
to collect various general and administrative costs.
8. Subsequent Event
On January 31, 1997, the Partnership paid a cash distribution totaling
$596,459 ($1.25 per Unit) to the Limited Partners (see note 3) and $12,173
to the General Partner.
29
<PAGE> 30
Schedule III
NET 2 L.P.
Real Estate and Accumulated Depreciation
December 31, 1996, 1995, and 1994
Initial cost to Partnership and gross amount
at which carried at end of period(A)
<TABLE>
<CAPTION>
Building &
Description Encumbrances Land Improvements Total(C)
- ----------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
Office, warehousing
facilities(E)(F) $ 2,050,657(B) 731,670 6,637,669 7,369,339
Retail stores,
Michigan(G) 2,533,965(B) 2,152,204 6,953,977 9,106,181
Warehouse and manufacturing
facility, Earth City, Missouri 1,218,015(B) 652,376 3,724,743 4,377,119
Office/school facility
Seattle, Washington 2,360,536(B) 8,482,938 8,482,938
Retail stores, Texas(H) 1,347,048(B) 3,198,507 1,642,312 4,840,819
Industrial warehouse
facility, Columbus, Ohio 681,849(B) 505,449 1,944,877 2,450,326
Office facility
Tucson, Arizona 467,700(B) 402,190 1,278,558 1,680,748
Retail store
Eau Claire, WI 2,944,727 815,000 3,371,786 4,186,786
Office/distribution
Milford, CT 820,710(B) 630,000 2,319,342 2,949,342
Office/headquarters facility
Southborough, MA 2,755,884 400,000 3,766,360 4,166,360
----------- --------- ---------- ----------
$17,181,091 9,487,396 40,122,562 49,609,958
=========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Life on which
depreciation
in latest income
Accumulated Date Date statements
Depreciation(D) Acquired Constructed is computed
--------------- ------------------ ------------ ----------------
<S> <C> <C> <C> <C>
Office, warehousing
facilities(E)(F) 1,306,783 February 1989 (F) 40 years
June, July and
Retail stores,
Michigan(G) 1,277,254 August 1989 various 40 years
Warehouse and manufacturing
facility, Earth City, Missouri 836,257 March 5, 1990 1985 40 years
Office/school facility
Seattle, Washington 1,440,325 March 30, 1990 1985 40 years
Retail stores, Texas(H) 372,921 June 19, 1990 various 40 years
Industrial warehouse
facility, Columbus, Ohio 305,904 September 14, 1990 1989 40 years
Office facility
Tucson, Arizona 201,107 September 28, 1990 1988 40 years
Retail store
Eau Claire, WI 212,613 June 22, 1994 1993 and 1994 40 years
Office/distribution
Milford, CT 117,257 December 23,1994 1994 40 years
Office/headquarters facility
Southborough, MA 121,623 September 21, 1995 1984 40 years
---------
6,192,044
=========
</TABLE>
- --------------------
(A) The initial cost includes the purchase price paid by the Partnership and
acquisition fees and expenses. There is no difference between the initial
cost for financial reporting purposes and the initial cost for federal
income tax purposes.
(B) The mortgage note is allocated based on the cost of the real estate.
(C) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $49,893,059 45,726,699 42,591,649
Additions during year 4,166,360 7,136,128
Sale of property (4,001,078)
Write-off of fully depreciated property 283,101
----------- ---------- ----------
Balance at end of year $49,609,958 49,893,059 45,726,699
=========== ========== ==========
</TABLE>
(D) Reconciliation of accumulated depreciation:
<TABLE>
<S> <C> <C> <C>
Balance at beginning of year $ 5,481,337 4,487,074 3,838,708
Write-off of accumulated depreciation (283,101) (352,989)
Depreciation expense 993,808 994,263 1,001,355
----------- ---------- ----------
Balance at end of year $ 6,192,044 5,481,337 4,487,074
=========== ========== ==========
</TABLE>
(E) These properties consist of two office/warehouse facilities, one in Ohio
and one in Arizona.
(F) The Ohio property was constructed in 1968, the Arizona property in 1981.
(G) These properties consist of 13 retail stores.
(H) These properties consist of 14 retail stores.
30
<PAGE> 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is a limited partnership and has no directors or officers.
The General Partner of the Partnership is Lepercq Net 2 L.P., a Delaware limited
partnership. Lepercq Net 2 Inc., a Delaware corporation, is the general partner
of the General Partner. The directors and executive officers of Lepercq Net 2
Inc. are discussed below. The directors and executive officers of Lepercq Net 2
Inc. are responsible for the management of the Partnership's business including,
but not limited to, the acquisition of, sale of, financing or refinancing of,
making certain major capital improvements to, or leasing of, Partnership
properties.
The directors and executive officers of Lepercq Net 2 Inc. are as follows:
Name Position
---- --------
E. Robert Roskind President and Secretary
Denise E. DeBaun Vice President
Antonia G. Trigiani Vice President and Treasurer
There is no family relationship among any of the foregoing persons.
Certain biographical information relating to the directors and executive
officers of Lepercq Net 2 Inc. is set forth below.
E. Robert Roskind, age 52, has been associated with LCP since 1973 and has been
Chairman of LCP since September 1976. He also serves as Chairman of the Board
and Co-Chief Executive Officer of Lexington Corporate Properties, Inc., a Real
Estate Investment Trust traded on the New York Stock Exchange. Mr. Roskind is a
graduate of the University of Pennsylvania and Columbia Law School, and has been
a member of the New York Bar since 1970.
Denise E. DeBaun, age 46, has been employed by LCP since 1981. She was a member
of the marketing department from 1986 to 1990, and is currently the manager of
Investor Relations. Ms. DeBaun is a graduate of Hunter College of the City
University of New York.
Antonia G. Trigiani, age 36, has been associated with LCP since 1989 as Vice
President-Asset Management. Ms. Trigiani also serves as Chief Financial Officer
and Treasurer of Lexington Corporate Properties, Inc., a Real Estate Investment
Trust traded on the New York Stock Exchange. Prior to joining LCP, she was
associated with HRE Properties and Merrill Lynch Hubbard, a real estate division
of Merrill Lynch and Company. Ms. Trigiani received her bachelor's degree from
Saint Mary's College at Notre Dame.
31
<PAGE> 32
ITEM 11. EXECUTIVE COMPENSATION
The General Partner is entitled to receive a share of cash distributions when
and as cash distributions are made to the Limited Partners, and a share of
taxable income or loss. Cash distributions of $48,691 were made to the General
Partner in 1996.
The directors and executive officers of Lepercq Net 2 Inc. received no
remuneration from the Partnership.
The General Partner and its affiliates were paid certain fees and commissions
and reimbursed for certain expenses.
Information concerning the cash distributions to the General Partner, and fees,
commissions and reimbursements paid to it or its affiliates, is contained in the
Statements of Changes in Partners' Capital (Deficit) and in Notes 7 and 8 of
Notes to Financial Statements in Item 8 above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person is known to the Partnership to be the beneficial owner of more
than 5% of the Units.
(b) None of the directors and executive officers of Lepercq Net 2 Inc. owns any
Units as of December 31, 1996.
(c) Lexington Corporate Properties, Inc., an affiliate of the General Partner,
owns 3,343 units as of December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership reimburses the General Partner or its affiliates for expenses
incurred and may pay interest on loans made in connection with acquisitions.
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). Such fees totaled approximately $52,000, $47,000 and $41,500 in
1996, 1995 and 1994, respectively. In addition, the Partnership has reimbursed
LCP for various general and administrative costs incurred on behalf of the
Partnership of approximately $80,000, $77,900 and $68,500, in 1996, 1995 and
1994, respectively. On October 1, 1996, LCP Group assigned its rights to
Lexington Corporate Properties Inc. to collect various general and
administrative costs.
Additional information with respect to the directors and officers and
compensation of the General Partner and affiliates is contained in Items 8, 10
and 11 above.
32
<PAGE> 33
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS-ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
1. Financial Statements (see index to Financial Statements filed as part
of Item 8 of this Annual Report).
2. Financial Statement Schedule (see Index to Financial Statements filed
as part of Item 8 of this Annual Report).
3. Exhibits
(3) Amended and Restated Agreement of Limited Partnership dated as of
November 9, 1988 set forth as Exhibit A to the Prospectus
included in Registration Statement Number 33-25984 is
incorporated herein by reference.
Second Amended and Restated Agreement of Limited Partnership
dated as of June 13, 1994 is incorporated herein by reference.
(10) Material contracts.
(i) Lease Agreements for the Tranzonic Properties
dated February 27, 1989.1
(ii) Sale-Purchase Agreement and Assignment of Purchase
Agreement for the Tranzonic Property (Arizona
Property) dated February 8, 1989 and February 28,
1989, respectively.2
(iii) Sale-Purchase Agreement for the Tranzonic Property
(Ohio Property) dated February 27, 1989.2
(iv) Closing Loan Agreement with Dollar Dry Dock
Savings Bank.2
(v) Sale-Purchase Agreement for the Initial Michigan
Properties dated June 29, 1989.3
(vi) Sale-Purchase Agreement for the Additional
Michigan Properties dated July 31, 1989.3
(vii) Sale-Purchase Agreement for the Final Michigan
Properties dated August 31, 1989.3
(viii) Lease agreements for the Initial Michigan
Properties dated June 29, 1989.3
a. Genessee, Store #44.
b. Mount Pleasant, Store #54.
c. Sandusky, Store #56.
33
<PAGE> 34
(ix) Lease agreements for the Additional Michigan
Properties dated July 31, 1989.3
a. Adrian, Store #38.
b. Bay City, Store #35.
c. Saginaw, Store #19.
(x) Lease agreements for the Final Michigan Properties
dated August 31, 1989.3
a. Auburn, Store #48.
b. Benton Harbor, Store #53.
c. Flint, Store #5.
d. Grand Blanc, Store #46.
e. Owosso, Store #15.
f. Saginaw, Store #49.
g. Swartz Creek, Store #33.
(xi) Sale-Purchase agreement for the Oregon Property
dated November 16, 1989.3
(xii) Lease agreement for the Oregon Property dated
November 16, 1989.3
(xiii) Lease Agreement for the Missouri Property dated
March 5, 1990.4
(xiv) Purchase Agreement for the Missouri Property dated
March 5, 1990.4
(xv) Lease Agreement for the Washington Property dated
March 30, 1990.4
(xvi) Agreement of Sale for the Washington Property
dated March 30, 1990.4
(xvii) Lease Agreements for the Texas Properties dated
June 19, 1990.4
a. Irving, Store #311.
b. El Paso, Store #1120.
c. San Antonio, Store #2115.
d. San Antonio, Store #3200.
e. San Antonio, Store #3201.
f. San Antonio, Store #3207.
g. San Antonio, Store #3213.
h. San Antonio, Store #3225.
i. San Antonio, Store #3234.
j. San Antonio, Store #3235.
k. San Antonio, Store #3244.
1. San Antonio, Store #3245.
m. San Antonio, Store #3250.
n. San Antonio, Store #3253.
o. San Antonio, Store #3255.
p. San Antonio, Store #3277.
34
<PAGE> 35
(xviii) Agreement of Sale and Purchase for the Texas
Properties dated May 16, 1990.4
(xix) Lease for the Ohio Property dated February 20,
1990.4
(xx) Purchase Agreement for the Ohio Property dated
July 31, 1990.4
(xxi) Lease Agreement for the Arizona Property dated
September 28, 1990.4
(xxii) Purchase Agreement for the Arizona Property dated
September 28, 1990.4
(xxiii) Loan Modification Agreement with Dollar Dry Dock
Savings Bank dated September 28, 1990.4
(xxiv) Lease Agreement with Total Petroleum, Inc. for the
Michigan Properties dated June 1, 1991.5
a. Adrian, Action Auto Store #38.
b. Auburn, Action Auto Store #48.
c. Bay City, Action Auto Store #35.
d. Benton Harbor, Action Auto Store #53.
e. Flint, Action Auto Store #5.
f. Genessee, Action Auto Store #44.
g. Grand Blanc, Action Auto Store #46.
h. Mount Pleasant, Action Auto Store #54.
i. Owosso, Action Auto Store #15.
j. Saginaw, Action Auto Store #19.
k. Saginaw, Action Auto Store #49.
1. Sandusky, Action Auto Store #56.
m. Swartz Creek, Action Auto Store #33.
(xxv) Lease Agreement with Everest & Jennings, Inc. for
the Missouri Property dated March 19, 1993.6
(28) Additional exhibits.
(i) Appraisals for the Tranzonic Properties dated
February 2, 1989 (Ohio Property) and December 23,
1988 (Arizona Property).
35
<PAGE> 36
(ii) Appraisals for the Michigan Properties.
a. Adrian, Action Auto Store #38.
b. Auburn, Action Auto Store #48.
c. Bay City, Action Auto Store #35.
d. Benton Harbor, Action Auto Store #53.
e. Flint, Action Auto Store #5.
f. Genessee, Action Auto Store #44.
g. Grand Blanc, Action Auto Store #46.
h. Mount Pleasant, Action Auto Store #54.
i. Owosso, Action Auto Store #15.
j. Saginaw, Action Auto Store #19.
k. Saginaw, Action Auto Store #49.
1. Sandusky, Action Auto Store #56.
m. Swartz Creek, Action Auto Store #33.
(iii) Appraisal for the Oregon Property dated June 5,
1989.
(iv) Appraisal for the Missouri Property dated February
14, 1990.
(v) Appraisal for the Washington Property dated May
26, 1986.
(vi) Appraisals for the Texas Properties dated June 15,
1990.
(vii) Appraisals for the Ohio Property dated June 19,
1990.
(viii) Appraisal for the Arizona Property dated November
1 1989.
(b) Reports on Form 8-K.
None.
(c) Exhibits. See (a)3 above.
(d) Financial Statement schedules excluded from the Annual Report to Unit
holders. None.
- ----------
1 Filed with the Partnership's Form 10-Q for the quarter ended March 31,
1989. These documents are incorporated herein by reference.
2 Filed with the Partnership's Form 10-Q for the quarter ended June 30, 1989.
These documents are incorporated herein by reference.
3 Filed with the Partnership's Form 10-Q for the quarter ended September 30,
1989. These documents are incorporated herein by reference.
4 Filed with the Partnership's Form 10-K for the year ended December 31,
1990. These documents are incorporated herein by reference.
5 Filed with Partnership's Form 10-K for the year ended December 31, 1991.
These documents are incorporated herein by reference.
6 Filed with Partnership's Form 10-K for the year ended December 31, 1993.
These documents are incorporated herein by reference.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this annual 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 L.P.,
its general partner
By: By:
-------------------------- ----------------------------------------
President Principal Financial & Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this annual report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the date indicated.
Signature Title
--------- -----
- ----------------------------- President and Secretary
E. Robert Roskind
- ----------------------------- Vice President
Denise E. DeBaun
- ----------------------------- Vice President and Treasurer
Antonia G. Trigiani
Date:
37
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE BALANCE SHEET
AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,124,659
<SECURITIES> 0
<RECEIVABLES> 1,816,481
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 49,609,958
<DEPRECIATION> (6,192,044)
<TOTAL-ASSETS> 50,001,798
<CURRENT-LIABILITIES> 0
<BONDS> 17,181,091
0
0
<COMMON> 0
<OTHER-SE> 32,517,731
<TOTAL-LIABILITY-AND-EQUITY> 50,001,798
<SALES> 0
<TOTAL-REVENUES> 5,913,207
<CGS> 0
<TOTAL-COSTS> 993,808
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,568,072
<INCOME-PRETAX> 2,308,182
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,308,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,308,182
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
