<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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _______________ to ______________
Commission File Number 33-25984
---------
NET 2 L. P.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3497738
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Lexington Corporate Properties Trust
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
($000)
June 30, 1998 (Unaudited) and December 31, 1997
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Real estate, at cost $ 56,882 $ 56,882
Less: accumulated depreciation 7,724 7,160
-------- --------
49,158 49,722
Property held for sale -- 526
Cash and cash equivalents 2,504 2,181
Deferred expenses (net of accumulated amortization of
$548 and $480 in 1998 and 1997, respectively) 309 377
Rent receivable 2,069 2,054
Other assets 252 141
-------- --------
$ 54,292 $ 55,001
======== ========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Mortgage notes payable $ 21,149 $ 22,106
Accrued interest payable 121 135
Accounts payable and other liabilities 361 313
-------- --------
21,631 22,554
-------- --------
Partners' capital (deficit):
General Partner (360) (365)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 33,021 32,812
-------- --------
Total partners' capital 32,661 32,447
-------- --------
$ 54,292 $ 55,001
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L. P.
STATEMENTS OF INCOME
($000)
Quarters Ended June 30, 1998 and 1997 and
Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Quarter Ended Quarter Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental $1,673 $1,425 $3,257 $2,787
Interest and other 36 42 64 91
------ ------ ------ ------
1,709 1,467 3,321 2,878
------ ------ ------ ------
Expenses:
Interest expense 476 437 967 833
Depreciation 282 255 564 503
Amortization of deferred expenses 34 34 68 68
General, administrative and other 169 199 292 341
------ ------ ------ ------
961 925 1,891 1,745
------ ------ ------ ------
Net income $ 748 $ 542 $1,430 $1,133
====== ====== ====== ======
Net income per Unit of limited
partnership interest $ 1.54 $ 1.12 $ 2.94 $ 2.33
====== ====== ====== ======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L. P.
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,430 $ 1,133
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 632 571
Loss on sale of property 11 --
Increase in rent receivable (99) (128)
Other, net (77) 17
------- -------
Total adjustments 467 460
------- -------
Net cash provided by operating activities 1,897 1,593
------- -------
Cash flows from investing activities:
Proceeds from sale of property 600 --
Acquisition of Westland, Michigan Property,
net of mortgage liability assumed -- (2,419)
------- -------
Net cash provided by (used in) investing activities 600 (2,419)
------- -------
Cash flows from financing activities:
Principal payments on mortgage notes (957) (219)
Decrease in restricted cash -- 100
Cash distributions to partners (1,217) (1,217)
------- -------
Net cash (used in) provided by financing activities (2,174) (1,336)
------- -------
Net increase (decrease) in cash and cash equivalents 323 (2,162)
Cash and cash equivalents at beginning of period 2,181 4,125
------- -------
Cash and cash equivalents at end of period $ 2,504 $ 1,963
======= =======
Supplemental disclosure of cash flow information:
Cash payments for interest $ 712 $ 836
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(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 to invest in
real estate properties or interests therein net leased to corporations
or other entities.
As of June 30, 1998, the Partnership has a total of 477,167 Units
issued and outstanding held by approximately 2,100 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, 1997.
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.
2. Summary of Significant Accounting Policies
------------------------------------------
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 for all the
periods presented.
Certain amounts included in the prior years' financial statements have
been reclassified to conform with the current years' presentation.
3. The Partnership Agreement
-------------------------
For financial statement reporting purposes all items of income are
allocated in the same proportion as distributions of distributable
cash.
<PAGE> 6
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
3. Continued
---------
Distributable cash attributed to a particular limited partner's Unit is
calculated from the date of admission to the Partnership. The unpaid
cumulative preferred return at June 30, 1998 totaled $22.763 million
($46.46 to $48.40 per Unit, per close). On July 31, 1998, the
cumulative preferred return that was unpaid at June 30, 1998 was
reduced by a cash distribution to the Limited Partners for the quarter
ended June 30, 1998 totaling $596,459 ($1.25 per Unit). The General
Partner received a cash distribution of $12,173 on July 31, 1998.
4. 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). For the six months ended June
30, 1998 and 1997, property management fees of $31,000 and $27,000,
respectively had been incurred.
5. Sale of Property
----------------
On April 13, 1998, the Parthership sold a property located in
Sandusky, Michigan for $600,000 in cash. The net proceeds from the
sale were used to repay part of the mortgage debt. The Partnership
incurred a loss of $11,000 from the sale, which is included in
general, administrative and other expense in the accompanying
Statements of Income.
6. Subsequent Events
-----------------
On July 24, 1998, the Partnership acquired two properties located in
Canton, Ohio ("Canton Property"), and Spartanburg, South Carolina
("Spartanburg Property") for an aggregate purchase price of $9.525
million. Total acquisition cost for Canton Property and Spartanburg
Property was satisfied by two first mortgage notes for approximately
$3.643 million and $3.025 million, respectively, and the remaining
balance in cash.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
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.
The unpaid cumulative preferred return at June 30, 1998 totaled $22.763 million
($46.46 to $48.40 per Unit, per close), and was reduced by $596,459 ($1.25 per
Unit) with the second quarter 1998 distribution paid in July 1998.
On April 13, 1998, the Partnership sold a property located in Sandusky, Michigan
for $600,000 in cash. The net proceeds from the sale were used to repay part of
the mortgage debt. The Partnership incurred a loss of $11,000 from the sale.
On July 24, 1998, the Partnership acquired two properties located in Canton,
Ohio ("Canton Property"), and Spartanburg, South Carolina ("Spartanburg
Property") for an aggregate purchase price of $9.525 million. Total acquisition
cost for Canton Property and Spartanburg Property was satisfied by two first
mortgage notes for approximately $3.643 million and $3.025 million,
respectively, and the remaining balance in cash.
Except for the debt service requirements under the mortgages, there are no
material restrictions upon the Partnership's present or future ability to make
distributions in accordance with the provisions of its Partnership Agreement.
Impact of Year 2000
- -------------------
The Partnership is evaluating its computer and communication systems that could
be affected by the "Year 2000" issue. The year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Partnership's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculation. The
Partnership presently believes that the year 2000 problem will not pose
operational problems for the Partnership's computer and communication systems
and will not have a material impact on the operations of the Partnership.
<PAGE> 8
Results of Operations ($000)
- ----------------------------
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------------------
Quarters Six months Quarters Six months
ended June 30, ended June 30, ended June 30, ended June 30,
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $1,709 $1,467 $3,321 $2,878 $ 242 $ 443
------ ------ ------ ------ ------ ------
Total expenses
Interest 476 437 967 833 39 134
Depreciation 282 255 564 503 27 61
Amortization 34 34 68 68 -- --
General, administrative
and other 169 199 292 341 (30) (49)
------ ------ ------ ------ ------ ------
961 925 1,891 1,745 36 146
------ ------ ------ ------ ------ ------
Net income $ 748 $ 542 $1,430 $1,133 $ 206 $ 297
====== ====== ====== ====== ====== ======
</TABLE>
The changes in results of operations with respect to revenues, interest and
depreciation for the quarter ended June 30, 1998 are primarily attributed to the
operations of real property investment acquired in the second quarter of 1997.
General and administrative expenses decreased in the quarter ended June 30,
1998, due to lower property operating expenses.
Accounting Standards Issued but not yet Adopted
- -----------------------------------------------
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The adoption of SFAS 133 is not expected to have any impact on
the financial position or results of operations of the Partnership.
<PAGE> 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
------------------------------------------------
Not applicable.
<PAGE> 10
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 second quarter
ended June 30, 1998. None.
<PAGE> 11
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 13, 1998 By: /s/ E. Robert Roskind
--------------- ----------------------
E. Robert Roskind
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 AND THE
BALANCE SHEET AS OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,503,676
<SECURITIES> 0
<RECEIVABLES> 2,069,265
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 56,882,220
<DEPRECIATION> (7,725,449)
<TOTAL-ASSETS> 54,290,765
<CURRENT-LIABILITIES> 0
<BONDS> 21,148,553
0
0
<COMMON> 0
<OTHER-SE> 32,660,736
<TOTAL-LIABILITY-AND-EQUITY> 54,290,765
<SALES> 0
<TOTAL-REVENUES> 3,321,274
<CGS> 0
<TOTAL-COSTS> 564,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 967,410
<INCOME-PRETAX> 1,430,665
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,430,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,430,665
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.94
</TABLE>
