10-Q 1 y54820e10-q.txt NET 2 L.P. 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, 2001 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 000-22566 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. PART 1. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NET 2 L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per Unit amounts) September 30, 2001 (Unaudited) and December 31, 2000

See accompanying notes to unaudited consolidated financial statements. NET 2 L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per Unit amounts) Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited)

(*) Amounts allocated to unit holders vary depending on the dates they became unit holders. See accompanying notes to unaudited consolidated financial statements. NET 2 L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Nine Months Ended September 30, 2001 and 2000 (Unaudited)

See accompanying notes to unaudited consolidated financial statements. NET 2 L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per Unit amounts) September 30, 2001 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. As of September 30, 2001, the Partnership owned interests in fifteen properties. As of September 30, 2001, the Partnership has a total of 477,167 Units issued and outstanding held by 1,858 limited partners. The unaudited financial statements reflect all adjustments that are, in the opinion of the General Partner, necessary to a fair statement of condition and 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, 2000. 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 periods presented. Management of the Partnership has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 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, 2001 totaled $32,067 ($65.96 to $67.90 per Unit, per close). On October 30, 2001, the cumulative preferred return that was unpaid at September 30, 2001 was reduced by a cash distribution to the Limited Partners for the quarter ended September 30, 2001 totaling $596 ($1.25 per Unit). The General Partner received a cash distribution of $12 in October 2001. NET 2 L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per Unit amounts) 4. Leases The leases are net leases requiring the lessees to pay all taxes, insurance, maintenance, and all other similar charges and expenses relating to the properties and their use and occupancy. Each of the following tenants/guarantors accounted for 10% or more of rental revenues for the nine months ended September 30, 2001 and 2000:

(*) Consists of two retail stores located in Westland, Michigan and Jacksonville, Alabama. Each of the tenants/guarantors which represented 10% or greater of rental revenue for the nine months ended September 30, 2001 and 2000, is a publicly registered company, except for Associated Grocers of Florida, Inc. Accordingly, each of these companies files periodic reports with the Securities and Exchange Commission. 5. Mortgages and Notes Payable On April 20, 2001, the Partnership sold a property located in Earth City, Missouri for net proceeds of $3,673 and repaid $3,500 on its loan facility with Key Bank. The Partnership realized a gain of $480 on the sale. 6. Related Party Transactions The General Partner has granted Lexington Corporate Properties Trust ("Lexington"), whose chairman and Co-Chief Executive Officer is an officer and a shareholder of the General Partner, an option exercisable at any time, to acquire the general partnership interest. Under the terms of the option, Lexington, subject to the approval of any such transaction by the independent members of the Board of Trustees, may acquire the general partnership interest at its fair market value based upon a formula relating to partnership cash flows, with Lexington retaining the option of paying such fair market value in securities of Lexington, limited partnership Units in controlled subsidiaries, cash or a combination thereof. NET 2 L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per Unit amounts) 6. Continued On November 13, 2000, the Partnership entered into an Agreement and Plan of Merger ("Agreement") with Lexington. On July 20, 2001, the Partnership announced amended terms of the agreement with Lexington. Under the new proposal, Lexington would issue $35,500 in cash and securities, and would assume existing debt of the Partnership. The limited partners would receive 99% of the merger consideration, payable 50% in cash and 50% in Lexington's common shares issued at a value not less than $14.00 per share nor more than $16 per share. The General Partner would receive 1% of the merger consideration in operating partnership units that are convertible into common shares on a one-for-one basis after five years and that would receive the same dividend as holders of common shares receive. The transaction is subject to customary conditions, including approval by Lexington's shareholders and the Partnership's limited partners. On October 12, 2001, a joint consent and proxy solicitation statement/prospectus was mailed to the Partnership's limited partners. The General Partner expects the proposed merger with Lexington to close in the fourth quarter of 2001. As of September 30, 2001, Lexington owns 15,782 units. An affiliate of Lexington 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). Property management fee which are included in general and administrative expenses totaled $25 each for the three months, and $77 and $72 for the nine months in 2001 and 2000, respectively. Lexington is reimbursed by the Partnership for various administrative services performed. For the three and nine months in 2001 and 2000, such reimbursements totaled $89 and $46, and $243 and $130, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Partnership attempts to maintain a working capital reserve equal to 1.5% of the gross proceeds of its offering, which is anticipated to be sufficient to satisfy liquidity requirements. Liquidity could be adversely affected by unanticipated costs, particularly costs relating to the vacancy of properties, tenants experiencing financial difficulties, and greater than anticipated operating expenses. To the extent that such working capital reserves are insufficient to satisfy the cost requirements of the Partnership, additional funds may be obtained through short-term or permanent loans or by reducing distributions to limited partners. The unpaid cumulative preferred return at September 30, 2001 totaled $32.07 million ($65.96 to $67.90 per Unit, per close), and was reduced by $596,000 ($1.25 per Unit) with the third quarter 2001 distribution paid in October 2001. 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 April 20, 2001, the Partnership sold a property located in Earth City, Missouri for net proceeds of $3.67 million and repaid $3.5 million on its loan facility with Key Bank. The Partnership realized a gain of $480,000 on the sale. Net cash provided by investing activities for the nine months ended September 30, 2001 totaled $3.67 million and was attributable to the sale of the Earth City, Missouri property. Net cash used in investing activities for the nine months ended September 30, 2000 totaled $7.87 million and was attributable to acquisition of the Hampton, Virginia and Plymouth, Michigan properties. Net cash used in financing activities for the nine months ended September 30, 2001 totaled $6.44 million and was attributable to the pay down of principal on the loan facility. Net cash provided by financing activities for the nine months ended September 30, 2000 totaled $5.17 million and was attributable to the net proceeds from mortgage financing less the impact of partners distributions. On November 13, 2000, the Partnership entered into the Agreement with Lexington. On July 20, 2001, the Partnership announced amended terms of the agreement with Lexington. Under the new proposal, Lexington would issue $35.5 million in cash and securities, and would assume existing debt of the Partnership. The limited partners would receive 99% of the merger consideration, payable 50% in cash and 50% in Lexington's common shares issued at a value not less than $14.00 per share nor more than $16 per share. The General Partner would receive 1% of the merger consideration in operating partnership units that are convertible into common shares on a one-for-one basis after five years and that would receive the same dividend as holders of common shares receive. The transaction is subject to customary conditions, including approval by Lexington's shareholders and the Partnership's limited partners. On October 12, 2001, a joint consent and proxy solicitation statement/prospectus was mailed to the Partnership's limited partners. The General Partner expects the proposed merger with Lexington to close in the fourth quarter of 2001. As of September 30, 2001, Lexington owns 15,782 units. Results of Operations (In thousands)

Total revenues did not materially change for the three months. Total revenue increased for the nine months due to percentage rent received that was offset by a decrease in interest income. Interest income decreased due to escrow accounts that were closed in the second quarter of 2000. Interest expense decreased for the three and nine months primarily due to lower interest rates and pay down of principal on the credit facility. General, administrative and other expenses increased in the three and nine months due to increases in property operating expenses and overhead. During the quarter, the Partnership accrued costs relating to the proposed acquisition of limited partners and general partner interest by Lexington and the impending liability on debt satisfaction. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership's exposure to market risk relates to its variable rate credit facility. As of September 30, 2001, the Partnership's variable rate indebtedness represented 18% of total long-term indebtedness. For the three and nine months ended September 30, 2001, the variable rate indebtedness had a weighted average interest rate of 7.13% and 7.45%, respectively. Had the weighted average interest rates been 100 basis points higher, the Partnership's net income for the three and nine months ended September 30, 2001, would have been approximately $30,000 and $92,000 less, respectively. 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.

(b) Reports on form 8-K filed during the third quarter ended September 30, 2001. (1) Form 8-K filed July 20, 2001, provided amendment of the agreement with Lexington. 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: November 14, 2001 By: /s/ E. Robert Roskind ---------------------- ---------------------------- E. Robert Roskind President

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