<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 quarterly period ended March 31, 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)
March 31, 1998 (Unaudited) and December 31, 1997
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
Real estate, at cost $ 56,988 $ 56,988
Less: accumulated depreciation 7,548 7,266
-------- --------
49,440 49,722
Property held for sale 526 526
Cash and cash equivalents 2,439 2,181
Deferred expenses (net of accumulated
amortization of $514 and $480
in 1998 and 1997, respectively) 343 377
Rent receivable 2,105 2,054
Other assets 121 141
-------- --------
$ 54,974 $ 55,001
======== ========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Mortgage notes payable $ 21,926 $ 22,106
Accrued interest payable 131 135
Accounts payable and other liabilities 397 313
-------- --------
22,454 22,554
-------- --------
Partners' capital (deficit):
General Partner (363) (365)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 32,883 32,812
-------- --------
Total partners' capital 32,520 32,447
-------- --------
$ 54,974 $ 55,001
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L. P.
STATEMENTS OF INCOME
($000 except per unit amounts)
Quarters Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, March 31,
1998 1997
------ ------
<S> <C> <C>
Revenues:
Rental $1,584 $1,362
Interest and other 28 49
------ ------
1,612 1,411
------ ------
Expenses:
Interest 491 396
Depreciation 282 248
Amortization of deferred expenses 34 34
General, administrative, and other 123 142
------ ------
930 820
------ ------
Net income $ 682 $ 591
====== ======
Net income per Unit of limited
partnership interest $ 1.40 $ 1.21
====== ======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L. P.
STATEMENTS OF CASH FLOWS
($000)
Quarters ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, March 31,
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 682 $ 591
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 316 282
Other, net 49 79
------- -------
Total adjustments 365 361
------- -------
Net cash provided by operating activities 1,047 952
------- -------
Cash flows from financing activities:
Decrease in restricted cash -- 100
Principal payments on mortgage notes (180) (100)
Cash distributions to partners (609) (609)
------- -------
Net cash used in financing activities (789) (609)
------- -------
Net increase in cash and cash equivalents 258 343
Cash and cash equivalents at beginning of period 2,181 4,125
------- -------
Cash and cash equivalents at end of period $ 2,439 $ 4,468
======= =======
Supplemental cash flow information:
Cash paid during the period for interest $ 495 $ 398
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
March 31, 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 March 31, 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.
2. Summary of Significant Accounting Policies
The leases relating to the properties are operating leases in accordance
with generally accepted accounting principles. Rental revenue is
recognized on a straight-line basis over the minimum lease terms. At March
31, 1998, 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.
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 $2.39 million of money market
instruments at March 31, 1998.
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 the quarters ended March 31,
1998 and 1997.
Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings
per Share" is effective for periods ending December 15, 1997. Application
of SFAS 128 had no effect on the Partnership's net income per unit for the
quarters ended March 31, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 130 and 131 are effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods, provided for comparative
purposes, is required. The adoption of SFAS 130 and 131 on January 1, 1998
had no effect on the financial statements of the Partnership.
<PAGE> 6
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
2. Continued
Management of the partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
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.
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 March 31, 1998 totaled $22.047 million
($44.96 to $46.90 per Unit, per close). On April 30, 1998, the cumulative
preferred return that was unpaid at March 31, 1998 was reduced by a cash
distribution to the Limited Partners for the quarter ended March 31, 1998
totaling $596,459 ($1.25 per Unit). The General Partner received a cash
distribution of $12,173 on April 30, 1998.
4. Mortgage Notes Payable
Principal paydowns of the mortgage notes payable for the succeeding five
years, (excluding $600,000 debt repayment made with the proceeds from the
sale of the property located in Sandusky, Michigan, which was repaid
subsequent to March 31, 1998) are as follows ($000):
<TABLE>
<CAPTION>
Year Ending
December 31, Amounts
------------ -------
<S> <C>
1998 (9 months) $ 548
1999 10,855
2000 531
2001 573
2002 618
2003 667
==========
</TABLE>
<PAGE> 7
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
5. Leases
Minimum total annual future rental payments receivable under the
noncancelable operating leases for the properties as of March 31, 1998,
(excluding the property located in Sandusky, Michigan which was sold
subsequent to March 31, 1998) are as follows ($000):
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
--------------- ----------
<S> <C>
1998 (9 months) $ 4,573
1999 6,129
2000 6,201
2001 6,251
2002 6,171
2003 6,009
2004-2008 24,570
2009-2013 10,662
2014-2015 955
----------
$ 71,521
==========
</TABLE>
The leases are triple net leases requiring the lessees to pay all taxes,
insurance, maintenance, and all other similar charges and expenses
relating to the properties and their use and occupancy.
6. Related Party Transactions
Leased Properties Management, Inc., an affiliate of the General Partner,
is entitled to receive a fee for managing the Partnership's properties in
the amount of 1% of gross annual rental receipts (or a greater amount in
certain circumstances). For the quarters ended March 31, 1998 and 1997,
property management fees of $15,000 and $13,000, respectively had been
incurred.
7. Subsequent Events
On April 13, 1998, the Partnership sold a property located in Sandusky,
Michigan for $600,000 in cash. The proceeds from the sale were used to
repay part of the mortgage debt.
<PAGE> 8
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 March 31, 1998 totaled $22.047 million
($44.96 to $46.90 per Unit, per close), and was reduced by $596,459 ($1.25 per
Unit) with the first quarter 1998 distribution paid in April 1998.
On April 13, 1998, the Partnership sold a property located in Sandusky, Michigan
for $600,000 in cash. The proceeds from the sale were used to repay part of
the mortgage debt.
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.
Results of Operations ($000)
<TABLE>
<CAPTION>
Quarters ended Increase (Decrease)
March 31, Quarter ended March 31,
1998 1997 1998-1997
---- ---- --------------
<S> <C> <C> <C>
Total revenues $1,612 $1,411 $ 201
------ ------ ------
Total expenses
Interest 491 396 95
Depreciation 282 248 34
Amortization 34 34 --
General & administrative 123 142 (19)
------ ------ ------
930 820 110
------ ------ ------
Net income $ 682 $ 591 $ 91
====== ====== ======
</TABLE>
The changes in results of operations with respect to revenues, interest and
depreciation for the quarter ended March 31, 1998 are primarily attributed to
the operations of the real property investment acquired in the second quarter of
1997.
General and administrative expenses decreased in the quarter ended March 31,
1998, due to lower property operating expenses.
<PAGE> 9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Changes in Securities - not applicable.
ITEM 3. Defaults under the Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders - not
applicable.
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
(b) Reports on form 8-K filed during the first quarter ended March
31, 1998.
None.
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET 2 L. P.
By: Lepercq Net 2 L. P.
its general partner
By: Lepercq Net 2 Inc.
its general partner
Date: May 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 ENDED MARCH 31, 1998 AND THE BALANCE SHEET
AS OF MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,439,192
<SECURITIES> 0
<RECEIVABLES> 2,105,052
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 56,987,063
<DEPRECIATION> (7,548,044)
<TOTAL-ASSETS> 54,974,555
<CURRENT-LIABILITIES> 0
<BONDS> 21,925,610
0
0
<COMMON> 0
<OTHER-SE> 32,520,937
<TOTAL-LIABILITY-AND-EQUITY> 54,974,555
<SALES> 0
<TOTAL-REVENUES> 1,612,452
<CGS> 0
<TOTAL-COSTS> 282,248
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 490,811
<INCOME-PRETAX> 682,234
<INCOME-TAX> 0
<INCOME-CONTINUING> 682,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682,234
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
