10-Q 1 y42562e10-q.txt NET 2 L.P. 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, 2000 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. 2 PART 1. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per Unit amounts) September 30, 2000 (Unaudited) and December 31, 1999

See accompanying notes to unaudited consolidated financial statements. 3 NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per Unit amounts) Three and Nine Months Ended September 30, 2000 and 1999 (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 4 NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Nine Months Ended September 30, 2000 and 1999 (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 5 NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (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. As of September 30, 2000, the Partnership owned interests in sixteen properties. As of September 30, 2000, the Partnership has a total of 477,167 Units issued and outstanding held by approximately 2,000 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/A for the year ended December 31, 1999. 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, 2000 totaled $29.204 million ($59.96 to $61.90 per Unit, per close). On October 30, 2000, the cumulative preferred return that was unpaid at September 30, 2000 was reduced by a cash distribution to the Limited Partners for the three months ended September 30, 2000 totaling $596,459 ($1.25 per Unit). The General Partner received a cash distribution of $12,173 in October 2000. 6 NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Properties During the nine months ended September 30, 2000, the Partnership entered into the following real estate transactions:

The following unaudited pro forma operating information for the nine months ended September 30, 2000 and 1999, were prepared as if the 2000 and 1999 acquisitions and dispositions were consummated as of January 1, 1999. This information does not purport to be indicative of what the operating results of the Partnership would have been had the acquisitions and dispositions been consummated on that date. Pro forma amounts are as follows:

The tenant of the Partnership's property in Earth City, Missouri, has declared bankruptcy. On June 30, 2000, this tenant, who represented approximately 3% of annualized rental revenue, has rejected the lease. The Partnership expects to incur expenses such as real estate property taxes, insurance and property repairs and maintenance. 5. Mortgage Notes Payable On March 20, 2000, the Partnership obtained a $7.5 million mortgage note secured by its Hampton, Virginia Property. The mortgage bears interest at 8.27% per annum and matures on April 1, 2010. The note requires yearly payments of principal and interest of approximately $677,000 and a balloon payment of approximately $6.8 million at maturity. 7 NET 2 L.P. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Continued On May 19, 2000, the Partnership obtained financing with Key Bank in the amount of $24.25 million with an interest rate of 250 basis points over the London Interbank Offered Rate ("LIBOR"). The note requires interest only payments and matures on January 10, 2001. The note is secured by nine properties located in Alabama (1), Arizona (2), Connecticut (1), Michigan (1), Ohio (2), Oregon (1) and South Carolina (1). 6. Related Party Transactions Leased Properties Management, Inc., an affiliate of Lexington Corporate Properties Trust ("Lexington"), whose chairman and Co-Chief Executive Officer is an officer and a shareholder 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, 2000 and 1999, property management fees, which are included in general and administrative expenses, totaled $71,500 and $71,100, respectively. Lexington Realty Advisors, an affiliate of Lexington, received acquisition fees totaling $120,000 for the nine months ended September 30, 2000. On May 19, 2000, the Partnership purchased from Lexington a property located in Plymouth, Michigan for approximately $8 million. Lexington is reimbursed by the Partnership for various administrative services performed. For the nine months ended September 30, 2000 and 1999, such reimbursements totaled $130,000 and $221,000, respectively. 7. Subsequent Event On November 14, 2000, Lexington and Net 1 L.P. and Net 2 L.P. announced that they entered into a merger agreement whereby Net 1 L.P. and Net 2 L.P. would merge into a subsidiary of Lexington. The transaction is subject to customary closing conditions including the approval of Lexington's shareholders and the limited partners of net 1 L.P. and Net 2 L.P. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements When used in this Form 10-Q Report, the words "believes", "expects", "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially. In particular, among the factors that could cause actual results to differ materially are failure to continue to qualify as a real estate partnership, general business and economic conditions, competition, increases in real estate construction costs, change in interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and illiquidity of real estate investments. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Partnership undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 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, 2000 totaled $29.204 million ($59.96 to $61.90 per Unit, per close), and was reduced by $596,459 ($1.25 per Unit) with the third quarter 2000 distribution paid in September 2000. During the nine months ended September 30, 2000, the Partnership entered into the following real estate transactions:

On March 20, 2000, the Partnership obtained a $7.5 million mortgage note secured by its Hampton, Virginia Property. The mortgage bears interest at 8.27% per annum and matures on April 1, 2010. The note requires yearly payment of principal and interest of approximately $677,000 and a balloon payment of approximately $6.8 million at maturity. 9 On May 19, 2000, the Partnership obtained financing with Key Bank in the amount of $24.25 million with an interest rate of 250 basis points over the London Interbank Offered Rate ("LIBOR"). The note requires interest only payments and matures on January 10, 2001. The note is secured by nine properties located in Alabama (1), Arizona (2), Connecticut (1), Michigan (1), Ohio (2), Oregon (1) and South Carolina (1). The tenant of the Partnership's property in Earth City, Missouri, has declared bankruptcy. On June 30, 2000, this tenant, who represented approximately 3% of annualized rental revenue, has rejected the lease. The Partnership expects to incur expenses such as real estate property taxes, insurance and property repairs and maintenance. 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 November 14, 2000, Lexington and Net 1 L.P. and Net 2 L.P. announced that they entered into a merger agreement whereby Net 1 L.P. and Net 2 L.P.would merge into a subsidiary of Lexington. The transaction is subject to customary closing conditions including the approval of Lexington's shareholders and the limited partners of Net 1 L.P. and Net 2 L.P. Results of Operations (In thousands)

The change in results of operations with respect to revenues, interest and depreciation for the three and nine months ended September 30, 2000 are primarily attributable to the acquisition and operation of the real property investments acquired during the first nine months of 2000. Rental revenues decreased in the three months ended September 30, 2000 due to the vacancy of the Missouri property, whose tenant filed for bankruptcy and rejected the lease. Interest and other income, included in total revenues, decreased due to interest earned on escrow accounts until the second quarter of 2000. The escrow accounts were restricted under Internal Revenue Code Section 1031 for property investments. These accounts were closed in June 2000. General and administrative expenses did not materially change for the three and nine months ended September 30, 2000. During the quarter ended September 30, 2000, the Partnership accrued costs relating to a proposed transaction. 10 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, 2000, the Partnership's variable rate indebtedness represented 41% of total long-term indebtedness. For the three and nine months ended September 30, 2000, the variable rate indebtedness had a weighted average interest rate of 9.17% and 9.30%, 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, 2000, would have been approximately $62,000 and $180,000 less, respectively. 11 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - not applicable. ITEM 2. Changes in Securities - not applicable. ITEM 3. Defaults under the Senior Securities - not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders - not applicable. ITEM 5. Other Information - not applicable. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit No. Exhibit ----------- ------- 27 Financial Data Schedule (b) Reports on form 8-K filed during the third quarter ended September 30, 2000. None. 12 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, 2000 By: /s/ E. Robert Roskind --------------------- ------------------------------------- E. Robert Roskind President

NET 2 L P 10-Q