Item 1. BUSINESS - -----------------
(a) General Development of Business -------------------------------
Citizens Bancshares, Inc. ("the Corporation") is a bank holding company organized in 1982 under the laws of the State of Ohio and registered with the Board of Governors of the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956, as amended. The Corporation has two wholly-owned subsidiary banks, a wholly-owned reinsurance company subsidiary and a wholly-owned courier company subsidiary.
THE CITIZENS BANKING COMPANY ("Citizens"), owned by the Corporation since 1982, was organized and chartered under the laws of the State of Ohio in 1902. Citizens is an insured bank under the Federal Deposit Insurance Act. This subsidiary accounts for approximately 96% of the Corporation's consolidated assets.
FIRST NATIONAL BANK OF CHESTER ("FNB"), owned by the Corporation since January 1, 1990, was organized and chartered as a national banking association under the laws of the United States on December 29, 1969 and formally opened for business on January 2, 1970. FNB is an insured bank under the Federal Deposit Insurance Act. This subsidiary accounts for approximately 4% of the Corporation's consolidated assets.
FREEDOM FINANCIAL LIFE INSURANCE COMPANY ("Freedom"), owned by the Corporation since August 1985, was organized and chartered under the laws of the State of Arizona in 1985. Freedom is a reinsurance company providing credit life and accident and health insurance coverage to Citizens' and FNB's loan customers. This subsidiary accounts for less than 1% of the Corporation's consolidated assets.
FREEDOM EXPRESS, INC. ("Express"), owned by the Corporation since 1994, was chartered under the laws of the State of Ohio in 1984. Express is a courier company formed to transport papers and documents between and among the states of Ohio, Pennsylvania and West Virginia. This subsidiary accounts for less than 1% of the Corporation's consolidated assets.
(b) Industry Segment Information ----------------------------
The Corporation is a bank holding company engaged in the business of commercial and retail banking, which accounts for substantially all of its revenue, operating income and assets. Reference is made to the statistical information regarding the Corporation included elsewhere herein and to Item 8 of this Form 10-K for financial information about the Corporation's banking business.
(c) Business --------
The Corporation's business is primarily incident to its two subsidiary banks. Its principal products and services involve collecting customer deposits, making loans and purchasing investments.
Interest and fees on loans accounted for 72.0% of total revenue in 1996, 70.6% in 1995 and 70.0% in 1994. Interest on securities is also a significant source of revenue, accounting for 21.4% of revenues in 1996, 22.6% in 1995 and 24.0% in 1994, respectively. Total cash and cash equivalents of $27,367,000 at year-end 1996 decreased $13,559,000 from year-end 1995. Citizens' loan portfolio does not include any foreign-based loans, loans to lesser developed countries, or loans to the corporation or its other subsidiaries.
The Corporation's business is not seasonal nor is it dependent upon a single or small group of customers. In the opinion of management, the Corporation does not have exposure to material costs associated with environmental hazardous waste clean-up.
The acquisition of The Navarre Deposit Bank Company in 1996 was accounted for as a pooling of interests. All prior periods have been restated to reflect the merger.
Competition-
The primary market area for Citizens is eastern Ohio and consists of all of Columbiana County, all of Carroll County, portions of Stark and Mahoning counties and the northern 75% of Jefferson County. A secondary market area is the southern portion of Jefferson County, the panhandle of West Virginia north of Follansbee, and a small portion of Pennsylvania south of Beaver and west of Darlington to the Ohio border.
FNB's primary market area is Hancock County, West Virginia, with overlap into the East Liverpool, Ohio market.
Citizens competes not only with other locally owned commercial banks and savings institutions, but with larger regional financial institutions in offering consumer and commercial financial service products.
FNB primarily competes with locally owned commercial banks, credit unions and savings institutions.
Employees-
The Corporation has no employees; however, Citizens and FNB employ approximately 355 full-time equivalents. The Corporation and its subsidiary banks are not parties to any collective bargaining agreements. Management considers its relationship with its employees to be good.
Financial Information about Foreign and Domestic Operations and Export Sales-
The Corporation and its subsidiaries do not have any banking offices located in a foreign country and with the exception of a $5,000 State of Israel bond, has no foreign assets, liabilities or related income and expense for the years presented in the financial statements incorporated by reference herein.
Supervision and Regulation-
Management is not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have a material effect on the Corporation.
The Corporation is a bank holding company under the Bank Holding Company Act of 1956, as amended, which restricts the activities of the Corporation and the acquisition by the Corporation of voting stock or assets of any bank, savings association or other company. The Corporation is also subject to the reporting requirements of, and examination and regulation by, the Board of Governors of the Federal Reserve Bank on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries. Banks and bank holding companies are prohibited from engaging in certain tie-in arrangements in connection with extensions of credit or provision of property or services.
Bank holding companies are also restricted in acquiring shares or substantially all of the assets of any bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted. Such an acquisition must be specifically authorized by statute of the state of the bank whose shares or assets are to be acquired. Ohio laws permit interstate banking on a reciprocal basis. Bank holding companies and banks located in Ohio may acquire or organize bank holding companies and banks in other states; conversely, bank holding companies and banks in such states may acquire or organize bank holding companies or acquire or charter banks in Ohio if the other state enacts effective reciprocal legislation granting Ohio bank holding companies and banks the same or greater authority.
Banks-
As an Ohio chartered bank, Citizens is supervised and regulated by the Ohio Division of Financial Institutions. As a national bank, FNB is supervised and regulated by the Comptroller of the Currency. The deposits of Citizens and FNB are insured primarily by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") and both entities are subject to the applicable provisions of the Federal Deposit Insurance Act. Approximately $131,900,000 of Citizens' deposits are insured by the Savings Association Insurance Fund of the FDIC. A subsidiary of a bank holding company can be liable for reimbursing the FDIC if the FDIC incurs or anticipates a loss because of a default of another FDIC insured subsidiary of the bank holding company or FDIC assistance provided to such subsidiary is in danger of default.
Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of Citizens and FNB, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest rate which may be charged thereon, restrictions relating to investments and other activities, limitations based on capital and surplus, limitations on payment of dividends and limitations on branching.
The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk weighted assets by assigning assets and off-balance sheet items to broad risk categories. FNB is subject to similar capital requirements adopted by the Comptroller of the Currency, and Citizens is subject to similar capital requirements adopted by the FDIC and the Ohio Division of Financial Institutions.
The Corporation and its subsidiaries currently satisfy all regulatory capital requirements. Failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC.
CERTAIN STATISTICAL INFORMATION REGARDING THE CORPORATION ---------------------------------------------------------
The following schedules present, for the periods indicated, certain financial and statistical information relative to the Corporation as required under the Securities and Exchange Commission's Industry Guide 3,
"Statistical Disclosure By Bank Holding Companies," or a specific reference as to the location of the required disclosures in the Corporation's 1996 Annual Report to Shareholders (Exhibit 13), portions of which are incorporated in this Form 10-K by reference.
I. A. and B. AVERAGE BALANCE SHEET AND RELATED ANALYSIS OF NET INTEREST ---------------------------------------------------------- EARNINGS: ---------
The information set forth under the heading "Financial Review -- Average Balance Sheets and Related Yields and Rates" on page 30 of the Corporation's 1996 Annual Report to Shareholders is incorporated herein by reference.
C. INTEREST RATES AND INTEREST DIFFERENTIAL RATE VOLUME ANALYSIS OF ---------------------------------------------------------------- CHANGES IN INTEREST INCOME AND INTEREST EXPENSE: ------------------------------------------------
The information set forth on page 31 of the Corporation's 1996 Annual Report to Shareholders is incorporated herein by reference.
II. INVESTMENT PORTFOLIO -------------------- A. The amortized costs, unrealized gains and losses and estimated fair values are as follows at December 31:
II. INVESTMENT PORTFOLIO (Continued) --------------------------------
II. INVESTMENT PORTFOLIO (Continued) -------------------------------
II. INVESTMENT PORTFOLIO (Continued) --------------------------------
B. The following is a schedule of maturities or next rate adjustment date of securities available for sale and the related weighted average yield as of December 31, 1996. This schedule is prepared using estimated fair value except for the yields which are calculated using the amortized cost of the related securities. Equity securities of $12,377,000 have been excluded from this schedule.
MATURITY OR NEXT RATE ADJUSTMENT DATE (dollars in thousands)
The following is a schedule of maturities or next rate adjustment date of each category of securities held to maturity and the related weighted average yield as of December 31, 1996. This schedule is prepared with the amortized cost of a security maturing or being placed within the time bracket at the next interest rate adjustment without regard to principal repayment.
MATURITY OR NEXT RATE ADJUSTMENT DATE (dollars in thousands)
II. INVESTMENT PORTFOLIO (Continued) --------------------------------
The weighted average yield is based on the effective yield for all bonds. The yields on the tax exempt portfolio have been adjusted for a tax equivalency rate of 35%. Mortgage-backed securities have been classified at their final stated maturity date, except for variable rate securities which are classified at their next rate adjustment date.
C. Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer which exceeded 10% of consolidated shareholders' equity of the Corporation at December 31, 1996.
III. LOAN PORTFOLIO --------------
A. TYPES OF LOANS - Total loans on the consolidated balance sheet are comprised of the following classifications at December 31.
B. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES - The following is a schedule of maturities and sensitivities of loans to changes in interest rates, excluding $1,158,000 in nonaccrual loans as of December 31, 1996:
MATURING OR NEXT RATE ADJUSTMENT DATE - - - -
III. LOAN PORTFOLIO (Continued) --------------------------
C. Risk Elements -------------
1) Nonaccrual, Past Due and Restructured Loans at December 31.
III. LOAN PORTFOLIO (Continued) -------------------------
(dollars in thousands) Information regarding impaired loans at December 31:
1) The policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that the collection of interest is doubtful, or when loans are past due as to principal and interest ninety days or more, except that in certain circumstances interest accruals are continued on loans deemed by management to be fully collectible. In such cases, the loans are individually evaluated in order to determine whether to continue income recognition after ninety days beyond the due dates. When loans are charged-off, any interest accrued in the current fiscal year is charged against interest income.
2) Potential Problem Loans - As of December 31, 1996, there were approximately $2,060,000 of loans representing the remaining balances of loans classified as substandard for regulatory purposes that have not been disclosed in Item III C. These loans and their potential loss exposure have been considered in management's analysis of the adequacy of the allowance for loan losses. These loans do not represent trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources.
3) Foreign Outstandings - There were no foreign outstandings for any year presented.
4) Loan Concentrations - As of December 31, 1996, there were no concentrations of loans greater than 10% of total loans which were not otherwise disclosed as a category of loans pursuant to Item III.A. above. Also refer to Note 1 to the Consolidated Financial Statements regarding concentration of credit risk on page 17 of the 1996 Annual Report to Shareholders incorporated herein by reference. Citizens provided financing to enterprises involved in purchasing pools of one-to-four family residential, home equity and other consumer loans. Such loans totaled approximately $65,464,000 at December 31, 1996. The source of repayment for these loans is the underlying pools of residential mortgage and consumer debt which represent diverse loan types and geographic distribution.
III. LOAN PORTFOLIO (Continued) --------------------------
5) No material amount of loans classified during Citizens' and FNB's most recent regulatory examinations as loss, substandard, doubtful or special mention have been excluded from the amounts discussed as nonaccrual, past due ninety days or more, restructured or potential problem loans.
D. OTHER INTEREST BEARING ASSETS - As of December 31, 1996, there were no other interest bearing assets that would be required to be disclosed under Item III.C.1. if such assets were loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE -------------------------------
A. The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31:
- ---------------------- (1) Net of unearned income.
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued) -------------------------------------------
The allowance for loan losses balance and the provision charged to expense are determined by management based upon periodic reviews of the loan portfolio, prior loan loss experience, economic conditions and various other circumstances which are subject to change over time. In making this judgment, management reviews selected large loans, delinquent loans, nonaccrual loans and problem loans. The collectibility of these loans is evaluated after considering the current financial position of the borrower, the estimated market value of the collateral and guarantees, and the priority of the Corporation's lien position. Subjective judgments as to the probability of loss and the amount of such loss are formed on these loans, as well as other loans in the aggregate.
B. The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related percentages.
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued) -------------------------------------------
While management's periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.
V. DEPOSITS --------
The following is a schedule of average deposit amounts and average rates paid on each category for the period indicated:
V. DEPOSITS (Continued) ---------------------
The following is a schedule of maturities of time deposits in amounts of $100,000 or more as of December 31, 1996:
VI. RETURN ON EQUITY AND ASSETS ---------------------------
The information required by this section is set forth under the heading "Selected Financial Data" on pages 28 and 29 of the Corporation's 1996 Annual Report to Shareholders and is incorporated herein by reference.
VII. SHORT-TERM BORROWINGS ---------------------
The following table sets forth certain information relative to the securities sold under agreements to repurchase and Federal funds purchased. Generally, repurchase agreements are sold to local government entities and businesses and have maturity terms of overnight to 30 days. Federal funds purchased generally have overnight terms.
Item 2.

Item 2. PROPERTIES
The Corporation does not own any properties. Citizens owns the properties listed below. All properties owned by Citizens are free from any major encumbrances.
Citizens also leases six offices located in Alliance, Canton, Wintersville, East Liverpool, Boardman and Struthers, Ohio.
FNB owns its one branch located at 253 Carolina Avenue, Chester, West Virginia. In the opinion of management, the properties owned or leased by Citizens and FNB are suitable and adequate for the continuing operations of the Corporation and its subsidiaries.
Item 3.

Item 3. LEGAL PROCEEDINGS. ------------------
There is no pending litigation, other than routine litigation incidental to the business of the Corporation and its affiliates, or of a material nature involving or naming the Corporation or any of its affiliates as a defendant. Further, there are not material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest which is adverse to the Corporation or any of its affiliates. None of the routine litigation in which the Corporation or any of its affiliates are involved is expected to have a material adverse impact upon the financial position or results of operations of the Corporation or any of its affiliates.
Item 4.

Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY-HOLDERS. ---------------------------------------------------
No matters were submitted to a vote of the Corporation's security- holders during the fourth quarter of 1996.
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ------------------------------------------------------------- MATTERS. --------
The information set forth under the heading "Common Stock" on page 35 of the Corporation's 1996 Annual Report to Shareholders is incorporated herein by reference (Exhibit 13).
Item 6.

Item 6. SELECTED FINANCIAL DATA. ------------------------
The information set forth under the heading "Selected Financial Data" on pages 28 and 29 of the Corporation's 1996 Annual Report to Shareholders is incorporated herein by reference (Exhibit 13).
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATION. ---------------------
The information set forth under the heading "Financial Review" on pages 29 through 35 of the Corporation's 1996 Annual Report to Shareholders is incorporated herein by reference (Exhibit 13). Management is not aware of any known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the liquidity, capital resources or operations of the Corporation. Management is not aware of any current recommendations by the Corporation's, Citizens' or FNB's regulatory authorities which, if they were to be implemented, would have such an effect.
Any loans classified for regulatory purposes as loss, doubtful, substandard or special mention and not disclosed under Item III of Industry Guide 3 on pages 10, 11 and 12 of this Form 10-K do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. Any such loans also do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. --------------------------------------------
The information set forth under the headings listed below on pages 12 through 28 of the Corporation's 1996 Annual Report to Shareholders is incorporated herein by reference (Exhibit 13).
Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Income - Three Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Shareholders' Equity - Three Years Ended December 31, 1996 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to the Consolidated Financial Statements Report of Independent Auditors
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. ---------------------
There has been no change in accountants for the applicable reporting period and there were no disagreements with accountants on accounting and financial disclosure.
PART III
Information relating to the following items is included in the Corporation's definitive Proxy Statement, dated February 14, 1997, for its Annual Meeting of Shareholders to be held on March 27, 1997 filed with the Commission, the following portions of which are incorporated herein by reference:
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ---------------------------------------------------
Set forth under the headings "Election of Directors", "Identification of Executive Officers", and "Section 16 Late Filings" on pages 1-2, 6 and 15, respectively, of the Corporation's Proxy Statement.
Item 11.

Item 11. EXECUTIVE COMPENSATION. -----------------------
Set forth under the headings "Bancshares Personnel and Compensation Committee and Citizens Personnel and Compensation Committee Report on Executive Compensation", "Summary Compensation Table", "Employment Contracts and Termination of Employment and Change-in-Control Arrangements", "Compensation Pursuant to Plans", "Pension Plan Table", "Option/SAR Grants in 1996", "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-end Option/SAR Values" and "Performance Graph" on page 3, 4, 7, 8, 9-11, 11, 12-13, 13 and 14 respectively, of the Corporation's Proxy Statement.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ---------------------------------------------------------------
Set forth under the heading "Security Ownership of Directors, Executive Officers and Certain Beneficial Owners" on pages 5 and 6 of the Corporation's Proxy Statement.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. -----------------------------------------------
Set forth under the heading "Transactions with Bancshares" on page 9 of the Corporation's Proxy Statement.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON -------------------------------------------------------- FORM 10-K. ----------
(a) The following documents are filed as part of this report:
1. Financial Statements - The following consolidated financial statements of the Corporation contained on pages 12 through 28 of the Corporation's 1996 Annual Report to Shareholders (Exhibit 13) are incorporated herein by reference under Item 8 of this Form 10-K:
Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Income - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes of Shareholders' Equity - Three Years Ended December 31, 1996 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to the Consolidated Financial Statements Report of Independent Auditors
2. Financial Statement Schedules are omitted as they are not required or not applicable, or the required information is included in the Financial Statements.
3. Exhibits -- Reference is made to the Exhibit Index which is found on page 25 of this Form 10-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: s/Marty E. Adams ----------------------------- Marty E. Adams President and Chief Executive Officer
And By: s/William L. White III ----------------------------- William L. White III Senior Vice President, Chief Financial Officer
And By: s/Paula Meiler ----------------------------- Paula Meiler, Comptroller
Date: March 7, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in their indicated capacities and as of this 7th day of March 1997.
s/James C. McBane - -------------------------------- James C. McBane, Chairman
s/Marty E. Adams - -------------------------------- Marty E. Adams, Director President, Chief Executive Officer
s/Keith Burgett - -------------------------------- Keith Burgett, Director
s/Willard L. Davis - -------------------------------- Willard L. Davis, Director
- -------------------------------- Fred H. Johnson, Director
s/Fred H. Johnson, III - -------------------------------- ---------------------------- Fred H. Johnson, III, Director Kenneth E. McConnell, Director
- -------------------------------- ---------------------------- Glenn F. Thorne, Director Gerard P. Mastroianni, Director
EXHIBIT INDEX - -------------
The following Exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table:
EXHIBIT 3 Articles of Incorporation and by-laws
(1) Registrant's Fourth Amended Articles of Incorporation.
(2) Registrant's Regulations, as amended (incorporated by reference in Exhibit 3 (2) to the Form S-4 Registration Statement No. 0-18209 of Citizens Bancshares, Inc.).
EXHIBIT 10 Material Contracts
(1) The Citizens Bancshares, Inc. Profit-Sharing Plan and Trust (formerly known as the CBC Salineville Profit Sharing Plan and Trust) (incorporated by reference in Exhibit 10(2) to the Form S-4 Registration Statement No. 0-18209 of Citizens Bancshares, Inc.).
(2) Citizens Bancshares, Inc. Employee Stock Ownership Plan (incorporated by reference in Exhibit 10(3) to the Form S-4 Registration Statement No. 0-18209 of Citizens Bancshares, Inc.).
(3) Form of Indemnification Agreement between Citizens Bancshares, Inc. and Individual Directors, Officers or Representatives (incorporated by reference in Exhibit 10(4) to the Form 10-K of Citizens Bancshares, Inc. for the fiscal year ended December 31, 1989.)
(4) Employment Agreement by and among Citizens Bancshares, Inc., The Citizens Banking Company and Marty E. Adams (incorporated by reference in Exhibit 10(5) to the Form 10-K of Citizens Bancshares, Inc. for the fiscal year ended December 31 1992.
(5) Amendment to Executive Employment Agreement by and among Citizens Bancshares, Inc., The Citizens Banking Company and Marty E. Adams (incorporated by reference in Exhibit 10(8) to the Form 10-K of Citizens Bancshares, Inc. for the fiscal year ended December 31, 1993.)
(6) Agreement by and among Citizens Bancshares, Inc., The Citizens Banking Company and Frank J. Koch (incorporated by reference in Exhibit 10(9) to the Form 10-K of Citizens Bancshares, Inc. for the fiscal year ended December 31, 1993.)
(7) Affiliation Agreement by and among Citizens Bancshares, Inc., The Citizens Banking Company, Unity Bancorp, Inc. and The New Waterford Bank (incorporated by reference in Exhibit 3(1) to the Form S-4 Registration Statement No. 33-80210 of Citizens Bancshares, Inc.
EXHIBIT INDEX - Continued - -------------------------
(8) Agreement of Merger by and between Citizens Bancshares, Inc. and Unity Bancorp, Inc. (incorporated by reference in Exhibit 10 (10) to the Form 10-K of Citizens Bancshares, Inc. for the fiscal year ended December 31, 1994).
(9) Citizens Bancshares, Inc. Non-Statutory Stock Option and Stock Appreciation Rights Plan. (incorporated by reference in Exhibit 10 (11) to the Form 10-Q of Citizens Bancshares, Inc. for the quarter ended June 30, 1995).
(10) The Employee Retirement Plan for Citizens Bancshares, Inc. (incorporated by reference in Exhibit 10 (12) to the Form 10-Q of Citizens Bancshares, Inc. for the quarter ended June 30, 1995).
(11) Affiliation Agreement by and among Citizens Bancshares, Inc., The Citizens Banking Company, Western Reserve Bank of Ohio (incorporated by reference in Exhibit 2 (1) to the Form S-4 Registration Statement No.33-99036 of Citizens Bancshares, Inc.)
(12) Agreement of Merger by and among Citizens Bancshares, Inc., The Citizens Banking Company and Western Reserve Bank of Ohio (incorporated by reference in Exhibit 10 (12) to the Form 10-K of Citizens Bancshares, Inc. for the fiscal year ended December 31, 1995)
(13) Plan and Agreement of Merger by and among Citizens Bancshares, Inc., The Citizens Banking Company and The Navarre Deposit Bank Company (incorporated by reference in Exhibit 10 (13) to the Form 10-Q of Citizens Bancshares, Inc. for the quarter ended March 31, 1996.)
EXHIBIT 11 Statement regarding Computation of Per Share Earnings (Included in Note 1 to the Consolidated Financial Statements).
EXHIBIT 13 The Corporation's Annual Report to Shareholders for the Fiscal Year Ended December 31, 1996.
EXHIBIT 21 Subsidiaries of the Registrant
EXHIBIT 23 Consents of Experts and Counsel
EXHIBIT 27 Financial Data Schedule


ITEM 1. BUSINESS
The registrant, Net 1 L.P. (the "Partnership") is a limited partnership formed on August 25, 1987 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing primarily in existing commercial properties which are then triple net leased to corporations or other entities. The Partnership Agreement was amended and restated on September 30, 1994, which enables the Partnership to make additional real estate investments.
The General Partner of the Partnership is Lepercq Net 1 L.P., a Delaware limited partnership (the "General Partner"). Lepercq Net 1 Inc. is the general partner of the General Partner. The directors and executive officers of Lepercq Net 1 Inc. are discussed in PART III, Item 10 (Directors and Executive Officers of the Registrant). Leased Properties Management, Inc., an affiliate of Lepercq Net 1 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 50,000 units at $1,000 per unit of limited partnership interests (the "Units") on November 20, 1987 pursuant to the Prospectus. The Prospectus was filed with the Securities and Exchange Commission as part of the Partnership's Registration Statement on Form S-11 (No. 33-16973). On January 17, 1989, the Partnership held the final admission of Limited Partners, and the offering was terminated after a total of 31,001 Units had been sold, equaling $31,001,000 in capital contributions. As of December 31, 1996, the Partnership had invested $30,827,269 of the proceeds of the offering in the properties, which are described in Item 2

ITEM 2. PROPERTIES
On July 18, 1988, the Partnership acquired a two-story health and tennis club facility (the "Scandinavian Property") located on three acres of land. It encompasses 36,500 gross square feet and is leased solely to Scandinavian U.S. Swim and Fitness, Inc., an indirect wholly owned subsidiary of Bally's Health and Tennis Corporation (HTC), under a net lease. The lease has a 20-year base term expiring July 17, 2008, with two optional five-year renewal terms.
On August 26, 1988, the Partnership acquired 16 Autozone stores (the "Autozone Properties"). Each of the Autozone Properties encompasses approximately 5,400 square feet in area (except for the 9,366 square-foot property in Florida) and is leased solely to AutoZone Inc. under 16 net leases. Each of the 16 leases has a 20-year base term expiring on August 25, 2008, with three optional renewal terms of five years each.
On February 28, 1989, the Partnership acquired an aggregate 99.9% general partnership interest in Subnet 1 Partners, a Delaware special purpose general partnership. On that date, Subnet 1 Partners acquired four bus terminals (the "Greyhound Properties") located in Barstow, San Bernardino, Stockton, and San Luis Obispo, California for an aggregate purchase price of $2,674,000. During 1991, all of the assets of Subnet 1 Partners were transferred to the Partnership and Subnet 1 Partners was dissolved. With the exception of the property in Barstow, California the Greyhound properties are leased to Greyhound Lines, Inc. ("Greyhound").
On August 22, 1994, the Partnership acquired approximately .835 acres of land with a building of approximately 9,300 square feet located in the City of Lynchburg, Virginia for approximately $751,000. The property is leased to Circuit City Stores, Inc. The lease has a 20-year base term expiring November 30, 2006 with two optional renewal terms of ten years each. The annual base rent is currently $73,072. The annual base rent is to be increased by 17.5% on the first day following each five-year period.
On July 14, 1995, the Partnership acquired a 99% limited partnership interest in Net 1 Sumter L.P., a Delaware special purpose limited partnership. The purpose of this partnership is to purchase, own, improve, lease, manage and sell a real property located at 853 Broad Street Sumter, South Carolina. On November 27, 1995, Net 1 Sumter L.P. acquired the Sumter Property for an aggregate purchase price of approximately $3.85 million. Related acquisition fees of $65,431 were incurred, of which $37,873 were paid to affiliates of the General Partner. The total acquisition cost was satisfied by a cash payment of $1,739,542 and an assumption of a 20-year, 10.375% secured note of $2,110,163. The Sumter Property is leased to Wal-Mart Stores Inc. The lease has a 25-year base term expiring January 31, 2008 with five optional renewal terms of five years each. The annual base rent is $328,113.
On November 14, 1995, the Partnership acquired a 99% limited partnership interest in Net 1 Gainesville L.P., a Delaware special purpose limited partnership. The purpose of this partnership is to purchase, own, improve, lease, manage and sell a real property located at 2275 Brown's Bridge Road, Gainesville, Georgia. On December 28, 1995, Net 1 Gainesville L.P. acquired the Gainesville Property for an aggregate purchase price of approximately $2.96 million. Related acquisition fees of $50,982 were incurred, of which $29,090 were paid to affiliates of the General Partner. The total acquisition cost was satisfied by a cash payment of $1,375,982 and an assumption of a 116-month, 13% first mortgage note of $1,197,461 and a 176-month, 7.5% second mortgage note of $440,476. The Gainesville Property is leased to Wal-Mart Stores Inc. The lease has a 25-year base term expiring January 31, 2009 with five optional renewal terms of five years each. The annual base rent is $218,188.
Minimum future rental payments receivable under the leases during the base terms for the properties owned by the Partnership at December 31, 1996 are as follows:
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Neither the Partnership nor its properties are subject to any pending legal proceedings.
ITEM 4.

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.
PART II.
ITEM 5.

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 1,724 investors holding 30,772 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 totaling $19,131,750 to the Limited Partners and $390,444 to the General Partner. (See note 3 of Notes to Consolidated Financial Statements.)
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of selected financial data for the Partnership for the years ended December 31:
(*) 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 Consolidated Financial Statements and the related notes appearing elsewhere in this report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
On November 20, 1987, the Partnership commenced the sale of up to 50,000 Units of limited partnership interests at $1,000 per Unit with the option to offer an additional 50,000 Units. As of January 17, 1989, the Partnership had raised a total of $31,001,000 in capital contributions (31,001 Units) and the offering was terminated. The net offering proceeds consisting of aggregate gross offering proceeds of $31,001,000 less related offering costs of $3,781,361, along with the proceeds from the closing loan and other 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.
Pursuant to the Partnership Agreement, limited partnership Units may be repurchased at 90% of the net asset value 60 days after the offer to repurchase has been made. No Units have been repurchased since 1990.
The Partnership attempts to maintain a working capital reserve in an amount equal to 3% of the gross proceeds of its offering, an amount which is anticipated to be sufficient to satisfy liquidity requirements. Liquidity of the Partnership could be adversely affected by unanticipated costs, additional lessees experiencing financial difficulties and greater than anticipated operating expenses. To the extent that such working capital reserves are insufficient to satisfy the cost requirements of the Partnership, additional funds may be obtained through short-term or permanent loans or by reducing distributions to limited partners.
As of December 31, 1996, the Partnership has made cumulative cash distributions to the Limited Partners totaling $19,131,750. The unpaid cumulative preferred return at December 31, 1996 totaled $9,010,878 (see note 3 of Notes to Consolidated Financial Statements). The ability of the Partnership to maintain or increase cash distributions to limited partners is dependent upon investments in additional income producing properties.
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
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.
Total revenues for the year ended December 31, 1996, increased $640,093 from 1995, primarily due to a full year effect of rental revenues received on properties acquired in 1995, offset by lower interest income on investments of excess cash. Total revenues for the year ended December 31, 1995 increased $154,117 from 1994, primarily due to higher interest earned on interest bearing bank investments.
Rental revenues for the year ended December 31, 1996, increased $803,491 from 1995, primarily due to a full year effect of rental income on properties acquired in 1995. Rental revenues for the year ended December 31, 1995, did not materially change from 1994.
The Partnership has recorded provisions for losses related to its properties of $6,113,530 in 1994.
Total expenses for the year ended December 31, 1996, increased $510,648 from 1995, primarily due to interest expense and depreciation on properties acquired in the fourth quarter of 1995. Total expenses for the year ended December 31, 1995 decreased $6,517,220, primarily due to the provision for losses on properties in 1994 and decreases in general and administrative expenses and depreciation.
Interest expense in 1995 was comparable to 1994. General and administrative expenses for the year ended December 31, 1995 decreased $155,534 from 1994, primarily due to a decrease in property operating expenses.
Net income for the year ended December 31, 1996, increased $454,124, primarily due to percentage rent received. Net income for the year ended December 31, 1995 decreased $2,698,542, from 1994, primarily due to proceeds from the lease termination on the Bloomingdale Property and the gain on the settlement of the long-term closing loan offset by the provision for losses on properties, all of which occurred in 1994.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
INDEX
Page ----
Independent Auditors' Report 12
Consolidated Balance Sheets at December 31, 1996 and 1995 13
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 14
Consolidated Statements of Changes in Partners' Capital (Deficit) for the years ended December 31, 1996, 1995 and 1994 15
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 16
Notes to Consolidated Financial Statements 17 - 23
Consolidated Financial Statement Schedule*
*Real Estate and Accumulated Depreciation Schedule III 24
- ----------
* All other schedules have been omitted because the required financial information is not applicable or the information is shown in the financial statements or notes thereto.
Independent Auditors' Report
The Partners Net 1 L.P.:
We have audited the consolidated financial statements of Net 1 L.P. and consolidated partnerships as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Net 1 L.P. and consolidated partnerships as of December 31, 1996 and 1995, and the results of their operations and their 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 consolidated 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
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
Assets 1996 1995 ------------ ----------- Real estate, at cost (notes 4 and 5): Buildings $ 15,725,091 15,725,091 Land 7,145,912 7,145,912 ------------ ----------- 22,871,003 22,871,003
Less: accumulated depreciation 2,296,399 1,903,854 ------------ ----------- 20,574,604 20,967,149
Cash and cash equivalents 2,123,011 1,816,179 Rent receivable 315,325 299,843 Other assets 165,963 328,907 ------------ -----------
$ 23,178,903 23,412,078 ============ ===========
Liabilities and Partners' Capital
Mortgage notes payable (note 5) 3,551,850 3,686,942 Accrued interest payable (note 5) 31,631 33,069 Accounts payable and other liabilities 87,007 159,824 ------------ -----------
3,670,488 3,879,835
Commitments and contingencies (note 5)
Partners' capital (note 3): General Partner (180,243) (179,767) Limited Partners ($1,000 per Unit, 50,000 Units authorized, 30,772 Units issued and outstanding) 19,688,658 19,712,010 ------------ -----------
Total partners' capital 19,508,415 19,532,243 ------------ -----------
$ 23,178,903 23,412,078 ============ ===========
See accompanying notes to consolidated financial statements.
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
(*) Amounts allocated to received by unit holders vary depending on the dates they became unit holders.
See accompanying notes to consolidated financial statements.
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
CONSOLIDATED 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 $ 19,151,109 (187,390) 19,338,499
Net income 3,791,846 75,837 3,716,009
Cash distributions (1,571,256) (31,425) (1,539,831) ------------ -------- -----------
Partners' capital (deficit) at December 31, 1994 21,371,699 (142,978) 21,514,677
Net income 1,093,304 21,866 1,071,438
Cash distributions (2,932,760) (58,655) (2,874,105) ------------ -------- -----------
Partners' capital (deficit) at December 31, 1995 19,532,243 (179,767) 19,712,010
Net income 1,547,428 30,949 1,516,479
Cash distributions (1,571,256) (31,425) (1,539,831) ------------ -------- -----------
Partners' capital (deficit) at December 31, 1996 $ 19,508,415 (180,243) 19,688,658 ============ ======== ===========
See accompanying notes to consolidated financial statements.
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
Supplemental schedule of non-cash financing and investing activities: During 1994, $2,973,988 net of provisions for losses on properties of $6,113,530 was reclassified to properties held for sale.
See accompanying notes to consolidated financial statements.
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
1. The Partnership
Net 1 L.P. (the "Partnership") was formed as a limited partnership on August 25, 1987 under the laws of the State of Delaware to invest in real estate or interests therein to be net leased to corporations or other entities.
On November 20, 1987, the Partnership commenced the sale of up to 50,000 Units of limited partnership interests at $1,000 per Unit with the option to offer an additional 50,000 Units. As of the last admission of Limited Partners, which occurred on January 17, 1989, the Partnership had raised a total of $31,001,000 (31,001 Units) from 1,638 investors and the offering was terminated.
Pursuant to the partnership agreement, limited partnership units may be repurchased, beginning in 1990. On September 30, 1990, the Partnership repurchased 229 limited partnership units for an aggregate purchase price of $169,930. No additional Units have been repurchased.
As of December 31, 1996 there was a total of 1,724 investors holding 30,772 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 December 31, 1996. Acquisition fees incurred in connection with the properties acquired have been capitalized as a component of the cost of such properties. Depreciation for financial reporting and Federal income tax purposes is determined by the straight-line method over the economic useful life of the property estimated to be 40 years for depreciable real property.
The financial statements reflect the accounts of the Partnership, Net 1 Sumter L.P. and Net 1 Gainesville L.P., on a consolidated basis. The Partnership owns a 99% limited partnership interest in each of Net 1 Sumter L.P. and Net 1 Gainesville L.P. The minority interest is not significant and is included in other liabilities and general, administrative and other expenses in the accompanying consolidated financial statements.
(Continued)
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
2., Continued
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 $2.096 million of money market instruments at December 31, 1996.
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 such taxes is that of the partners rather than the Partnership.
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 Units outstanding was 30,772 for 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 at 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 not 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 capital contributions. Thereafter, such distributions are to be made 85% to the Limited Partners and 15% to the General Partner.
(Continued)
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
3., Continued
For financial statement reporting purposes, all items of income are allocated in the same proportion as cumulative distributions of distributable cash.
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 cumulative cash distributions to the Limited Partners totaling $19,131,750 ($643.73 to $585.19 per unit, per close). The unpaid cumulative preferred return at December 31, 1996 totaled $9,010,878 ($293.41 to $289.61 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 were $50.04, $93.40, and $50.04, respectively.
On January 31, 1997, the unpaid cumulative preferred return at December 31, 1996 was reduced by a cash distribution to the Limited Partners for the quarter ended December 31, 1996 totaling $384,958 ($12.51 per unit) (see note 8).
The Partnership Agreement was amended and restated on September 30, 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 cumulative distributions of distributable cash or cumulative 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 statement 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 June 28, 1988, the Partnership acquired an office building located in Bloomingdale, Illinois (the "Bloomingdale Property") for a purchase price of $10,150,400. The Bloomingdale Property was leased to Policy Management Systems Corporation ("PMSC"), a company which services health insurance systems software. On February 14, 1994, the Partnership entered into a lease termination agreement with PMSC which released PMSC from its obligation to pay rent in exchange for a cash payment of $7.9 million.
On November 30, 1994, the Partnership entered into an agreement to sell the property for $3 million. Accordingly, the Partnership wrote down the carrying value of the property to the amount of estimated net proceeds to be realized by incurring a provision for loss of $6,113,530 for the year ended December 31,1994. The Bloomingdale Property was sold on March 15, 1995 for approximately $3 million and with proceeds of $2,649,309. The Partnership incurred a loss of approximately $325,000 from the sale.
(Continued)
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
4., Continued
On July 18, 1988, the Partnership acquired a health and tennis club facility located in Phoenix, Arizona (the "Scandinavian Property") for a purchase price of $5,520,700. The Scandinavian Property is leased to Scandinavian U.S. Swim and Fitness, Inc., an indirect and wholly owned subsidiary of Bally Health and Tennis Corporation, a major operator of fitness centers in the United States. The lease has a 20-year base term expiring July 17, 2008, with two optional five-year renewal terms. The minimum net rents to be received during the first five years of the base term of the lease are $607,277 per annum. The rent payable under the lease will be increased at the expiration of the first 60 months of the term of the lease and will increase every 60 months thereafter by 11.5% of the rent payable during the preceding 60-month period. If the lessee executes its option, the annual rent amounts will be similarly increased.
On August 26, 1988 the Partnership acquired 16 Autozone stores (the "Autozone Properties") located in five states for a purchase price of $6,538,300. The Autozone Properties are leased to AutoZone Inc., a privately held company which sells automotive parts. The 16 leases each have a 20-year base term expiring on August 25, 2008 with three optional renewal terms of five years each. The total annual net rents for all 16 leases during the base term are equal to the greater of $735,559 or 2.25% of the aggregate gross sales of the Autozone Properties. From inception of the lease, 2.25% of the aggregate gross sales have not exceeded $735,559. During the renewal terms, rents are the greater of 2% of the aggregate gross sales or the average annual rent paid in the last two years of the term preceding the start of such renewal term.
On February 1, 1989, the Partnership acquired a warehouse distribution facility located in Warwick Township, Pennsylvania (the "Nichols Property") for a purchase price of $4,085,000. The Nichols Property was leased to Schreiber Company, a distributor of nationally advertised brand-name products. On April 26, 1991, the tenant of the Nichols Property filed a petition with the United States Bankruptcy Court (the "Bankruptcy Court") for relief under Chapter 11 of the United States Code (the "Bankruptcy Code"). The tenant of the Nichols Property liquidated its assets, discontinued its business operations and vacated the Nichols Property.
In 1993, the Partnership wrote down the value of the property, to what it believed was the investment's recoverable value, by charging provisions for losses on real estate of $1,000,000. On May 4, 1994, the Partnership sold the property for $1.5 million and realized a loss of approximately $64,000.
On February 28, 1989, the Partnership acquired an aggregate 99.9% general partnership interest in Subnet 1 Partners, a Delaware special purpose general partnership. On that date, Subnet 1 Partners acquired four bus terminals (the "Greyhound Properties") located in Barstow, San Bernardino, Stockton, and San Luis Obispo, California for an aggregate purchase price of $2,756,800. During 1991, all of the assets of Subnet 1 Partners were transferred to the Partnership and Subnet 1 Partners was dissolved. With the exception of the property in Barstow, California, the Greyhound Properties are leased to Greyhound Lines, Inc. ("Greyhound").
(Continued)
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
4., Continued
On August 22, 1994, the Partnership acquired approximately .835 acres of land, with a building of approximately 9,300 square feet located in the City of Lynchburg, Virginia for approximately $751,000. The property is net leased to Circuit City Stores, Inc. The lease has a 20-year base term expiring November 30, 2006 with two optional renewal terms of ten years each. The annual base rent is $73,072. The annual base rent is to be increased by 17.5% on the first day following each five-year period.
On July 14, 1995, the Partnership acquired a 99% limited partnership interest in Net 1 Sumter L.P., a Delaware special purpose limited partnership. The purpose of this partnership is to purchase, own, improve, lease, manage and sell a real property located at 853 Broad Street, Sumter, South Carolina. On November 27, 1995, Net 1 Sumter L.P. acquired the Sumter Property for an aggregate purchase price of approximately $3.85 million. Related acquisition fees of $65,431 were incurred, of which $37,843 were paid to affiliates of the General Partner. The total acquisition cost was satisfied by a cash payment of $1,739,542, and an assumption of a 20-year, 10.375% secured note of $2,110,163. The Sumter Property is leased to Wal-Mart Stores Inc. The lease has a 20-year base term expiring January 31, 2008 with five optional renewal terms of five years each. The annual base rent is $328,113.
On November 14, 1995, the Partnership acquired a 99% limited partnership interest in Net 1 Gainesville L.P., a Delaware special purpose limited partnership. The purpose of this partnership is to purchase, own, improve, lease, manage and sell a real property located at 2275 Brown's Bridge Road, Gainesville, Georgia. On December 28, 1995, Net 1 Gainesville L.P. acquired the Gainesville Property for an aggregate purchase price of approximately $2.96 million. Related acquisition fees of $50,982 were incurred, of which $29,090 were paid to affiliates of the General Partner. The total acquisition cost was satisfied by a cash payment of $1,375,982 and assumption of a 116-month, 13% first mortgage note of $1,197,461 and a 176-month, 7.5% second mortgage note of $440,476. The Gainesville Property is leased to Wal-Mart Stores Inc. The lease has a 25-year base term expiring January 31, 2009 with five optional renewal terms of five years each. The annual base rent is $218,188.
5. Mortgage Notes Payable and Long-Term Closing Loan
In 1988, an agreement was entered into with a commercial lender 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 $1,200,239 to the Partnership.
On July 14, 1995, the Partnership acquired a 99% limited partnership interest in Net 1 Sumter L.P. and in Net 1 Gainesville L.P., Delaware special purpose limited partnerships. On November 27, 1995, Net 1 Sumter L.P. acquired the Sumter Property for approximately $3.85 million by a cash payment and by an assumption of a 20-year, 10.375% secured note. The balance of the note on the date of acquisition was $2,110,163. The debt service of $25,500 is payable monthly in arrears.
(Continued)
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
5., Continued
On December 28, 1995, Net 1 Gainesville L.P. acquired the Gainesville Property by a cash payment and assumption of a 116-month, 13% first mortgage note and a 176-month, 7.5% second mortgage note. The balances of the mortgage notes on the date of acquisition were $1,197,461 and $440,476. The first mortgage note provides for debt service payments of $18,182 and is payable monthly in arrears while interest on the second note is accruing and being added to principal.
Principal paydowns of the mortgage notes payable for the succeeding five years are as follows:
Year ending December 31 Amount ----------------------- ------
1997 $194,855 1998 218,767 1999 245,657 2000 275,898 2001 309,914 ========
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 $ 2,399,476 1998 2,431,921 1999 2,477,344 2000 2,477,344 2001 2,478,597 Thereafter 16,887,285 ----------- $29,151,967 ===========
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.
(Continued)
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
6., Continued
Each of the following properties (as hereinafter defined) accounted for 10% or more of rental revenues shown for the years ended December 31:
Property 1996 1995 1994 -------- ---- ---- ----
Scandinavian 25% 36% 36% AutoZone 29% 40% 41% Greyhound 13% 18% 17% Sumter 18% - - Gainesville 12% - -
At December 31, 1996, the Scandinavian property accounted for 21%, the AutoZone properties accounted for 27%, the Greyhound properties accounted for 9%, the Sumter property accounted for 16% and the Gainesville property accounted for 13%, of total assets.
7. Related Parties
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 years ended December 31, 1996, 1995 and 1994, management fees totaled $26,911, $18,217, and $19,874, respectively.
LCP, an affiliate of the General Partner received acquisition fees of $66,933 for the year ended December 31, 1995.
8. Subsequent Event
On January 31, 1997, the Partnership paid a cash distribution totaling $384,958 to the Limited Partners and $7,856 to the General Partner.
Schedule III
NET 1 L.P. AND CONSOLIDATED PARTNERSHIPS 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)
(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. The total costs of the properties acquired in 1988 exceed the initial costs due to the Partnership's subsequent incurrence of other costs related to the acquisitions.
(B) See note 5: Mortgage Notes Payable
(E) These properties consist of 16 retail stores, which are located as follows: two in Alabama, two in Florida, one in Georgia, five in New Mexico and six in Texas.
(F) The 16 retail stores were constructed in different years.
(G) These properties consist of three bus terminals, located and constructed as follows:
San Bernardino, CA, constructed in 1987; Stockton, CA, constructed in 1967, San Luis Obispo, CA, constructed in 1963.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10.

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 1 L.P., a Delaware limited partnership. Lepercq Net 1 Inc., a Delaware corporation, is the general partner of the General Partner. The directors and executive officers of Lepercq Net 1 Inc. are discussed below. The directors and executive officers of Lepercq Net 1 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 1 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 1 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.
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.
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 of New York.
ITEM 11.

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 $31,425 were made to the General Partner in 1996.
The directors and executive officers of Lepercq Net 1 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 Consolidated Statements of Changes in Partners' Capital (Deficit) and in notes 7 and 8 of Notes to Consolidated Financial Statements in Item 8 above.
ITEM 12.

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) Directors and executive officers of Lepercq Net 1 Inc. and affiliated entities own 92 Units as of December 31, 1996.
ITEM 13.

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 $26,911, $18,217, and $19,874 in 1996, 1995, and 1994, respectively.
LCP, an affiliate of the General Partner received acquisition fees of $66,933 for the year ended December 31, 1995.
Additional information with respect to the directors and officers and compensation of the General Partner and affiliates is contained in Items 7, 10 and 11 above.
PART IV.
ITEM 14.

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 20, 1987 set forth as Exhibit A to the Prospectus included in Registration Statement Number 33-16973 is incorporated herein by reference.
Second Amended and Restated Agreement of Limited Partnership dated as of September 30, 1994 is incorporated herein by reference.
(10) Material contracts
(i) Sale-Purchase Agreement for the Greyhound Properties dated February 27, 1989.*
(ii) Lease Agreement for the Greyhound Properties dated February 27, 1989.*
(iii) Sale-Purchase Agreement for the Nichols Property dated February 1, 1989.**
(iv) Lease Agreement for Nichols Property dated February 1, 1989.**
(v) Loan Modification Agreement with the Dollar Dry Dock Bank dated September 28, 1990.***
(vi) Purchase Agreement for the Sumter Property dated June 8, 1995.****
(vii) Partnership Agreement for Net 1 Sumter L.P. dated July 14, 1995.****
(viii) Purchase Agreement for Gainesville Property dated October 27, 1995.****
(ix) Partnership Agreement for Net 1 Gainesville L.P. dated November 14, 1995.****
(28) Additional exhibits
(i) Appraisals for the Greyhound Properties dated November 1, 1988.*
(ii) Appraisal for the Nichols Property dated September 7, 1988.*
(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.
- ---------- * Filed with the Partnership's Form 10-Q for the quarter ended March 31, 1989. These documents are incorporated herein by reference. ** Filed with the Partnership's Form 10-Q for the quarter ended June 30, 1989. These documents are incorporated herein by reference. *** Filed with the Partnership's Form 10-K for the year ended December 31, 1990. This document is incorporated herein by reference. **** Filed with the Partnership's Form 10-K for the year ended December 31, 1995. These documents are incorporated herein by reference.
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 1 L.P.
By: Lepercq Net 1 L.P., its general partner
By: Lepercq Net 1 Inc., 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:
EXHIBIT INDEX -------------
Exhibit No. Description ------- -----------
27 Financial Data Schedule