<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 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)
September 30, 1998 (Unaudited) and December 31, 1997
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Real estate, at cost $ 74,034 $ 56,882
Less: accumulated depreciation 8,041 7,160
-------- --------
65,993 49,722
Property held for sale -- 526
Cash and cash equivalents 312 2,181
Deferred expenses (net of accumulated amortization of
$582 and $480 in 1998 and 1997, respectively) 275 377
Rent receivable 2,114 2,054
Other assets 241 141
-------- --------
$ 68,935 $ 55,001
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage and notes payable $ 30,822 $ 22,106
Accrued interest payable 128 135
Accounts payable and other liabilities 723 313
-------- --------
31,673 22,554
-------- --------
Partners' capital (deficit):
General Partner (268) (365)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 37,530 32,812
-------- --------
Total partners' capital 37,262 32,447
-------- --------
$ 68,935 $ 55,001
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
NET 2 L. P.
STATEMENTS OF INCOME
($000)
Quarters Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Quarter Ended Quarter Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
<S> <C> <C> <C> <C>
Rental $1,732 $1,583 $4,989 $4,370
Interest and other 11 31 75 123
------ ------ ------ ------
1,743 1,614 5,064 4,493
------ ------ ------ ------
Expenses:
Interest expense 553 505 1,520 1,338
Depreciation 317 285 881 789
Amortization of deferred expenses 34 34 102 102
General, administrative and other 155 123 436 464
------ ------ ------ ------
1,059 947 2,939 2,693
------ ------ ------ ------
Income before gain on sale
of properties, net 684 667 2,125 1,800
Gain on sale of properties, net 4,527 -- 4,516 --
------ ------ ------ ------
Net income $5,211 $ 667 $6,641 $1,800
====== ====== ====== ======
Net income per Unit of limited
partnership interest $10.70 $ 1.37 $13.64 $ 3.70
====== ====== ====== ======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
NET 2 L. P.
STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 6,641 $ 1,800
-------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 983 891
Gain on sale of properties, net (4,516) --
Increase in rent receivable (144) (194)
Other, net 303 111
-------- --------
Total adjustments (3,374) 808
-------- --------
Net cash provided by operating activities 3,267 2,608
-------- --------
Cash flows from investing activities:
Proceeds from sale of properties 11,801 --
Acquisition of properties (23,827) (2,419)
-------- --------
Net cash used in investing activities (12,026) (2,419)
-------- --------
Cash flows from financing activities:
Principal payments on mortgage notes (1,147) (386)
Proceeds from mortgage and notes payable 9,863 --
Decrease in restricted cash -- 100
Cash distributions to partners (1,826) (1,826)
-------- --------
Net cash provided by (used in) financing activities 6,890 (2,112)
-------- --------
Net decrease in cash and cash equivalents (1,869) (1,923)
Cash and cash equivalents at beginning of period 2,181 4,125
-------- --------
Cash and cash equivalents at end of period $ 312 $ 2,202
======== ========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 1,527 $ 1,342
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
September 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 September 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 98%
of 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.
In June 1997, SFAS No. 130,"Reporting Comprehensive Income", and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," were issued. SFAS No. 130 established standards for
reporting and displaying comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for
earlier periods, provided for comparative purposes, is required. The
statement also requires the accumulated balance of other comprehensive
income to be displayed separately from retained earnings and additional
paid-in capital in equity section of the balance sheet. SFAS No. 131
establishes standards for reporting information about operating
segments in annual and interim financial statements.
<PAGE> 6
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
2. Continued
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Categories required to
be reported as well as reconciled to the financial statements are
segment profit or loss, certain specific revenue and expense items, and
segment assets. SFAS No. 130 and No. 131 are effective for fiscal years
beginning after December 15, 1997. The adoption of these standards had
no impact on the Partnership's financial position and operating results
as of and for the nine months ended September 30, 1998.
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 September 30, 1998 totaled $23.478
million ($47.96 to $49.90 per Unit, per close). On October 30, 1998,
the cumulative preferred return that was unpaid at September 30, 1998
was reduced by a cash distribution to the Limited Partners for the
quarter ended September 30, 1998 totaling $596,459 ($1.25 per Unit).
The General Partner received a cash distribution of $12,173 on October
30, 1998.
4. Properties
During the nine months ended September 30, 1998, the Partnership
entered into the following real estate transactions:
<TABLE>
<CAPTION>
Lease Net
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Acquisition Tenant Location (000's) (000's) (month/year) Feet
----------- ------ -------- ------- ------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
July 24 Best Buy Canton, OH $ 5,300 $ 465 2/18 46,350
July 24 Best Buy Spartanburg, SC 4,500 395 2/18 45,004
September 29 Hollywood Videos Wilsonville, OR 14,000 1,345 9/08 122,853
</TABLE>
The Partnership financed the acquisition of the properties through
borrowings with an average interest rate of 8.5%, as partial
satisfaction of the purchase prices.
In addition, the Partnership sold two properties for an aggregate
selling price of $12.1 million and recognized a gain of approximately
$4.5 million.
<PAGE> 7
NET 2 L. P.
NOTES TO FINANCIAL STATEMENTS
4. Continued
The following unaudited pro forma operating information for the nine
months ended September 30, 1998 and 1997 were prepared as if the 1998
and 1997 acquisitions, and the 1998 disposition were consummated as of
January 1, 1997. The information do not purport to be indicative of
what the operating results of the Partnership would have been had the
acquisitions or disposition been consummated on that date. Pro forma
amounts are as follows:
<TABLE>
<CAPTION>
Pro Forma
($000, except per Unit amounts)
Nine months ended
September 30,
1998 1997
------ ------
<S> <C> <C>
Revenues $5,773 $5,658
Expenses 3,597 3,723
------ ------
Net income $2,176 $1,935
====== ======
Net income per Unit of
limited partnership interest $ 4.47 $ 3.97
====== ======
</TABLE>
5. Related Party Transactions
In addition to property transactions described above, 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 nine months ended September 30, 1998 and 1997,
property management fees of $48,000 and $42,000, respectively had been
incurred.
6. Subsequent Events
On October 29, 1998, the Partnership received a line of credit for one
year from Nations Credit Commercial Corporation of up to $24.5 million
bearing interest at a rate of 315 basis points over LIBOR. The line of
credit will be used to fund future acquisitions.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The unpaid cumulative preferred return at September 30, 1998 totaled $23.478
million ($47.96 to $49.90 per Unit, per close), and was reduced by $596,459
($1.25 per Unit) with the third quarter 1998 distribution paid in October 1998.
During the nine months ended September 30, 1998, the Partnership entered into
the following real estate transactions:
<TABLE>
<CAPTION>
Lease Net
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Acquisition Tenant Location (000's) (000's) (month/year) Feet
----------- ------ -------- ------- ------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
July 24 Best Buy Canton, OH $ 5,300 $ 465 2/18 46,350
July 24 Best Buy Spartanburg, SC 4,500 395 2/18 45,004
September 29 Hollywood Videos Wilsonville, OR 14,000 1,345 9/08 122,853
</TABLE>
The Partnership financed the acquisition of the properties through borrowings
with an average interest rate of 8.5%, as partial satisfaction of the purchase
prices.
In addition, the Partnership sold two properties for an aggregate selling price
of $12.1 million and recognized a gain of approximately $4.5 million.
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.
On October 29, 1998, the Partnership received a line of credit for one year from
Nations Credit Commercial Corporation of up to $24.5 million bearing interest at
a rate of 315 basis points over LIBOR. The line of credit will be used to fund
future acquisitions.
Recent Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," were
issued. SFAS No. 130 established standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements.
Reclassification of financial statements for earlier periods, provided for
comparative purposes, is required. The statement also requires the accumulated
balance of other comprehensive income to be displayed separately from retained
earnings and additional paid-in capital in equity section of the balance sheet.
SFAS No. 131 establishes standards for reporting information about operating
segments in annual and interim financial statements. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Categories required to be reported as well as reconciled to the
financial statements are segment profit or loss, certain specific revenue and
expense items, and segment assets. SFAS No. 130 and No. 131 are effective for
fiscal years beginning after December 15, 1997. The adoption of these standards
had no impact on the Partnership's financial position and operating results as
of and for the nine months ended September 30, 1998.
<PAGE> 9
Impact of Year 2000
The Year 2000 compliance issue concerns the inability of computer systems to
accurately calculate, store or use a date after 1999. This could result in a
system failure or miscalculations causing disruptions of operations.
The Year 2000 issue affects virtually all companies and organizations.
The Partnership has been taking the necessary steps to understand the nature and
extent of the work required to make its core information computer systems and
non-information embedded systems Year 2000 compliant. The Partnership has
determined that it will not be necessary to modify, update or replace its
computer hardware and software applications.
The vendor that provides the Partnership's existing general ledger software has
released a compliant version of its product which the Partnership is currently
using. The cost of the general ledger system did not have a material effect on
the Partnership's financial condition or results of operations. The
Partnership's properties, which have no scheduled lease expirations prior to
August 18, 2002, are subject to net leases and accordingly the Year 2000
compliance of embedded systems (e.g., security, HVAC, fire and elevator systems)
are the responsibility of the tenants. The Partnership has contacted each of its
tenants asking them to identify and evaluate the changes and modifications
necessary to make these systems compliant for Year 2000 processing. The cost
associated with the effect to make the embedded systems Year 2000 compliant are
the tenant's responsibility. However, no assurances can be given that the
properties embedded systems will be Year 2000 compliant by December 31, 1999 and
compliance costs, if any, incurred by the Partnership would not be significant.
The Partnership is communicating with significant third-party service providers
and vendors with which it does business to determine the efforts being made on
their part for compliance. The Partnership is attempting to receive compliance
certificates from all third parties that have a material impact on the
Partnership's operations, but no assurance can be given with respect to the cost
or timing of such efforts or the potential effects of any failure to comply.
Management will closely monitor the Partnership's entire Year 2000 compliance
function and will develop contingent plans if necessary.
<PAGE> 10
Results of Operations ($000)
<TABLE>
<CAPTION>
Quarters Nine months Increase (Decrease)
ended ended Quarters Nine months
September 30, September 30, ended ended
1998 1997 1998 1997 September 30, September 30,
---- ---- ---- ---- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 1,743 $ 1,614 $ 5,064 $ 4,493 $ 129 $ 571
------- ------- ------- ------- ------- -------
Total expenses
Interest 553 505 1,520 1,338 48 182
Depreciation 317 285 881 789 32 92
Amortization 34 34 102 102 -- --
General, administrative
and other 155 123 436 464 32 (28)
------- ------- ------- ------- ------- -------
1,059 947 2,939 2,693 112 246
------- ------- ------- ------- ------- -------
Income before gain on sale
of properties, net 684 667 2,125 1,800 17 325
Gain on sale of properties, net 4,527 -- 4,516 -- 4,527 4,516
------- ------- ------- ------- ------- -------
Net income $ 5,211 $ 667 $ 6,641 $ 1,800 $ 4,544 $ 4,841
======= ======= ======= ======= ======= =======
</TABLE>
The changes in results of operations with respect to revenues, interest and
depreciation for the quarter ended September 30, 1998 are primarily attributed
to the operations of real property investments acquired in the third quarter of
1998.
General and administrative expenses decreased in the nine months ended September
30, 1998, due to lower property operating expenses.
<PAGE> 11
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
________________________________________________
Not applicable.
<PAGE> 12
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 as of and for the
nine months ended September 30, 1998
(b) Reports on form 8-K filed during the quarter ended
September 30, 1998.
There were two Form 8-K's filed during the quarter
ended September 30, 1998
(1) Form 8-K/A dated July 24, 1998, filed September
22, 1998. Provided financial information for
certain acquired properties and pro forma
financial information for the Partnership.
(2) Form 8-K dated September 29, 1998, filed October
13, 1998. Provided financial information for
certain acquired properties and pro forma
financial information for the Partnership.
<PAGE> 13
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: __________________ By: _________________________
E. Robert Roskind
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
INTERIM STATEMENT OF INCOME FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 311,469
<SECURITIES> 0
<RECEIVABLES> 2,113,629
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 74,034,492
<DEPRECIATION> (8,041,561)
<TOTAL-ASSETS> 68,934,223
<CURRENT-LIABILITIES> 0
<BONDS> 30,821,586
0
0
<COMMON> 0
<OTHER-SE> 37,262,001
<TOTAL-LIABILITY-AND-EQUITY> 68,934,223
<SALES> 0
<TOTAL-REVENUES> 5,064,046
<CGS> 0
<TOTAL-COSTS> 880,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,520,425
<INCOME-PRETAX> 6,640,561
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,640,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,640,561
<EPS-PRIMARY> 13.64
<EPS-DILUTED> 13.64
</TABLE>
