-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CAVYwwAWk5ztvJJpfEaIUckg3P/lpijQyJfJ8v5tbli1Feftrjzho/zw0Jk8JRNu rFEQ9NyA6cyOUmWzH3SJQA== 0000950123-97-007553.txt : 19970912 0000950123-97-007553.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950123-97-007553 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970904 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE PROPERTY ASSOCIATES 2 CENTRAL INDEX KEY: 0000312918 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 133022196 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-09727 FILM NUMBER: 97675185 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA 2ND FL CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA 2ND FL CITY: NEW YORK STATE: NY ZIP: 10020 10-K405/A 1 CORPORATE PROPERTY ASSOCIATES 2 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the quarterly period ended DECEMBER 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-9727 CORPORATE PROPERTY ASSOCIATES 2 (Exact name of registrant as specified in its charter) CALIFORNIA 13-3022196 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 492-1100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP UNITS (Title of Class) (Title of Class) 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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of Registrant: There is no active market for Limited Partnership Units. 2 Part II Item 8. Consolidated Financial Statements and Supplementary Data. (i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 1995 and 1996. (iii) Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996. (iv) Consolidated Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (vi) Notes to Consolidated Financial Statements. -6- 3 REPORT of INDEPENDENT ACCOUNTANTS To the Partners of Corporate Property Associates 2 and Subsidiaries: We have audited the accompanying consolidated balance sheets of Corporate Property Associates 2 (a California limited partnership) and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule included on pages 17 to 19 of this Annual Report. These financial statements and financial statement schedule are the responsibility of the General Partners. Our responsibility is to express an opinion on these consolidated financial statements and 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 the General Partners, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporate Property Associates 2 (a California limited partnership) and Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the financial information required to be included therein pursuant to Securities and Exchange Commission Regulation S-X Rule 12-28. /s/ Coopers & Lybrand L.L.P. New York, New York March 17, 1997 -5- 4 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1996
1995 1996 ------------ ------------ ASSETS: Real estate leased to others: Accounted for under the operating method: Land $ 4,850,433 $ 4,850,433 Buildings 12,555,513 12,756,321 ------------ ------------ 17,405,946 17,606,754 Accumulated depreciation 5,351,359 5,850,679 ------------ ------------ 12,054,587 11,756,075 Net investment in direct financing leases 20,060,127 20,259,530 ------------ ------------ Real estate leased to others 32,114,714 32,015,605 Cash and cash equivalents 577,506 1,066,861 Accrued interest and rents receivable, net of reserve for uncollected rents of $22,660 in 1995 348,201 360,786 Other assets, net of accumulated amortization of $83,725 in 1995 and $3,571 in 1996 82,862 239,271 ------------ ------------ Total assets $ 33,123,283 $ 33,682,523 ============ ============ LIABILITIES: Mortgage notes payable $ 7,262,720 $ 7,787,061 Note payable to affiliate 250,000 Accrued interest payable 109,632 75,233 Accounts payable and accrued expenses 74,884 66,050 Accounts payable to affiliates 57,263 63,447 Security deposits 282,800 283,694 ------------ ------------ Total liabilities 8,037,299 8,275,485 ------------ ------------ Commitments and contingencies PARTNERS' CAPITAL: General Partners 196,888 208,334 Limited Partners (54,900 Limited Partnership Units issued and outstanding at December 31, 1995 and 1996) 24,889,096 25,198,704 ------------ ------------ Total partners' capital 25,085,984 25,407,038 ------------ ------------ Total liabilities and partners' capital $ 33,123,283 $ 33,682,523 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. -6- 5 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of INCOME For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ---------- ---------- ---------- Revenues: Rental income $1,513,091 $1,717,457 $1,850,494 Interest income from direct financing leases 3,437,921 3,174,996 2,688,154 Other interest income 186,038 170,631 46,177 Other income 24,397 122,720 6,138 ---------- ---------- ---------- 5,161,447 5,185,804 4,590,963 ---------- ---------- ---------- Expenses: Interest 1,593,880 1,351,797 731,843 Depreciation 501,657 519,891 499,320 General and administrative 276,283 298,974 274,126 Property expense 618,277 402,928 454,044 Amortization 17,195 16,133 6,848 Writedown to net realizable value 445,551 ---------- ---------- ---------- 3,452,843 2,589,723 1,966,181 ---------- ---------- ---------- Income before gain on sale of real estate 1,708,604 2,596,081 2,624,782 Gain on sale of real estate 23,451 ---------- ---------- ---------- Net income $1,732,055 $2,596,081 $2,624,782 ========== ========== ========== Net income allocated to: Individual General Partner $ 1,732 $ 2,596 $ 2,625 ========== ========== ========== Corporate General Partner $ 15,589 $ 23,365 $ 23,623 ========== ========== ========== Limited Partners $1,714,734 $2,570,120 $2,598,534 ========== ========== ========== Net income per Unit: (55,000 Limited Partnership Units in 1994, 54,975 weighted average Limited Partnership Units in 1995 and 54,900 Limited Partnership Units in 1996) $ 31.18 $ 46.75 $ 47.33 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -7- 6 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of PARTNERS' CAPITAL For the years ended December 31, 1994, 1995 and 1996
Partners' Capital Accounts --------------------------------------------------------------- Limited Partners' General Limited Amount Per Total Partners Partners Unit (a) ------------ ------------ ------------ ------------ Balance, December 31, 1993 $ 23,737,447 $ 183,113 $ 23,554,334 $ 428 Distributions (1,458,890) (14,590) (1,444,300) (26) Net income, 1994 1,732,055 17,321 1,714,734 32 ------------ ------------ ------------ ------------ Balance, December 31, 1994 24,010,612 185,844 23,824,768 434 Repurchase of Limited Partner Units (29,042) (29,042) Distributions (1,491,667) (14,917) (1,476,750) (27) Net income, 1995 2,596,081 25,961 2,570,120 47 ------------ ------------ ------------ ------------ Balance, December 31, 1995 25,085,984 196,888 24,889,096 454 Distributions (2,303,728) (14,802) (2,288,926) (42) Net income, 1996 2,624,782 26,248 2,598,534 47 ------------ ------------ ------------ ------------ Balance, December 31, 1996 $ 25,407,038 $ 208,334 $ 25,198,704 $ 459 ============ ============ ============ ============
(a) Based on the weighted average Units issued and outstanding during all periods. The accompanying notes are an integral part of the consolidated financial statements. -8- 7 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 1,732,055 $ 2,596,081 $ 2,624,782 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 518,852 536,024 506,168 Cash receipts on direct financing leases less than amortization of unearned income (15,604) (32,043) (199,403) Writedown to net realizable value 445,551 Restructuring fees received, net of costs 3,237,685 Gain on sale of real estate (23,451) Net change in operating assets and liabilities 113,132 (173,738) (139,675) ----------- ----------- ----------- Net cash provided by operating activities 2,770,535 6,164,009 2,791,872 ----------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of real estate 124,615 Additional capitalized costs (6,851) (200,808) ----------- ----------- ----------- Net cash provided by (used in) investing activities 124,615 (6,851) (200,808) ----------- ----------- ----------- Cash flows from financing activities: Distributions to partners (1,458,890) (1,491,667) (2,303,728) Repurchase of Limited Partner Units (29,042) Proceeds from note payable to affiliate 250,000 1,000,000 Payment of note payable to affiliate (1,250,000) Payments of mortgage principal (1,617,464) (1,489,763) (936,587) Proceeds from mortgages 7,000,000 Prepayments of mortgage payable (7,005,103) (5,539,072) Deferred financing costs (72,322) ----------- ----------- ----------- Net cash used in financing activities (3,076,354) (9,765,575) (2,101,709) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (181,204) (3,608,417) 489,355 Cash and cash equivalents, beginning of year 4,367,127 4,185,923 577,506 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 4,185,923 $ 577,506 $ 1,066,861 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -9- 8 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Basis of Consolidation: The consolidated financial statements include the accounts of Corporate Property Associates 2 and its wholly-owned subsidiaries (collectively, the "Partnership"). Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Leased to Others: Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Partnership diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States. The leases are accounted for under either the direct financing or operating methods. Such methods are described below: Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the lease. Operating method - Real estate is recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. The Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of undiscounted cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value. Substantially all of the Partnership's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides. Depreciation: Depreciation is computed using the straight-line method over the estimated useful lives of components of the particular properties, which range from 5 to 35 years. Cash Equivalents: The Partnership considers all short-term, highly-liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Partnership's cash and cash equivalents at December 31, 1995 and 1996 were held in the custody of two financial institutions. Continued -10- 9 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Other Assets: Included in other assets are deferred charges which are costs incurred in connection with mortgage note refinancing and are amortized on a straight-line basis over the terms of the mortgages. Income Taxes: A partnership is not liable for Federal income taxes as each partner recognizes his proportionate share of the partnership income or loss in his tax return. Accordingly, no provision for income taxes is recognized for financial statement purposes. 2. Partnership Agreement: The Partnership was organized on August 9, 1979 under the Uniform Limited Partnership Act of the State of California for the purpose of engaging in the business of investing in and leasing industrial and commercial real estate. The Corporate General Partner purchased 200 Limited Partnership Units in connection with the Partnership's public offering. The Partnership will terminate on December 31, 2017, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement"). The Agreement provides that the General Partners are allocated 1% (1/10 of 1% to the Individual General Partner, William P. Carey, and 9/10 of 1% to the Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey")) and the Limited Partners are allocated 99% of the profits and losses as well as distributions of distributable cash from operations, as defined. The partners are also entitled to receive net proceeds from the sale of the Partnership properties as defined in the Agreement. The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of Partnership assets. Pursuant to the subordination provisions of the Agreement, the preferred return may be paid only after the limited partners receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return ranging from 6% to 9% since the inception of the Partnership. The General Partners interest in such preferred return amounts to $1,048,845 based upon the cumulative proceeds from the sale of assets since the inception of the Partnership through December 31, 1996. The Partnership's ability to satisfy the subordination provisions of the Agreement may not be determinable until liquidation of a substantial portion of the Partnership's assets has been made, formal plans of liquidation are adopted or limited partnership units are converted to other securities which provide the security holder with greater liquidity than a limited partnership unit. Management believes that as of the report date, ultimate payment of the preferred return is reasonably possible but not probable, as defined pursuant to Statement of Financial Accounting Standards No. 5. 3. Transactions with Related Parties: Under the Agreement, a division of W.P. Carey is entitled to receive a property management fee and reimbursement of certain expenses incurred in connection with the Partnership's operations (see Note 11). Property management fee in 1995 includes the effect of a lease restructuring transaction. General and administrative expense reimbursements consist primarily of the actual cost of personnel needed in providing administrative services, necessary to the operation of the Partnership. Property management fee and general and administrative expense reimbursements are summarized as follows:
1994 1995 1996 ---- ---- ---- Property management fee $ 57,148 $254,174 $101,644 General and administrative expense reimbursements 56,265 51,138 51,394 -------- -------- -------- $113,413 $305,312 $153,038 ======== ======== ========
Continued -11- 10 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATION FINANCIAL STATEMENTS, Continued During 1994, 1995 and 1996, fees aggregating $29,657, $39,370 and $192,086, respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner. The Partnership is a participant in an agreement with W.P. Carey and other affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Partnership's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and 1996 were $46,172, $51,472 and $45,007, respectively. In connection with a note payable to an affiliate, which was paid off in 1996, the Partnership incurred interest expense of $20,335. The Partnership's ownership interests in certain properties are jointly held with affiliated entities as tenants-in-common with the Partnership's ownership interests ranging from 28.5% to 40%. The Partnership accounts for its assets and liabilities relating to tenants-in-common interests on a proportional basis. 4. Real Estate Leased to Others Accounted for Under the Operating Method: Scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to approximately $1,981,000 in 1997; $1,774,000 in 1998; $1,767,000 in 1999; $1,772,000 in 2000; and $1,746,000 in 2001 and aggregate approximately $15,938,000 through 2012. Contingent rents were approximately $65,000 in 1996. 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, ------------ 1995 1996 ----------- ----------- Minimum lease payments receivable $37,321,569 $34,832,818 Unguaranteed residual value 22,700,673 22,700,673 ----------- ----------- 60,022,242 57,533,491 Less, Unearned income 39,962,115 37,273,961 ----------- ----------- $20,060,127 $20,259,530 =========== ===========
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to approximately $2,509,000 in 1997; $2,485,000 in 1998; $2,473,000 in 1999, $2,543,000 in 2000; and $2,708,000 in 2001 and aggregate approximately $34,833,000 through 2013. Contingent rents were approximately $176,000 and $149,000 in 1994 and 1995, respectively. No contingent rents were realized in 1996. Continued -12- 11 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 6. Mortgage Notes Payable: The Partnership's two mortgage notes payable, both of which are limited recourse obligations, are collateralized by the assignment of leases and by real property with a carrying amount as of December 31, 1996 of approximately $18,448,000, before accumulated depreciation. As of December 31, 1996, mortgage notes payable bear interest at rates of 7.24% and 9% per annum. One mortgage note matures in 1998 and the other mortgage note matures in 2010. Scheduled principal payments during each of the next five years following December 31, 1996 and thereafter are as follows:
Year Ending December 31, ------------------------ 1997 $ 895,764 1998 708,924 1999 370,390 2000 397,943 2001 427,546 Thereafter 4,986,494 ---------- Total $7,787,061 ==========
Interest paid was $1,605,141, $1,422,223 and $769,023 in 1994, 1995 and 1996, respectively. 7. Distributions to Partners: Distributions are declared and paid to partners quarterly and are summarized as follows:
Limited Year Ending Distributions Paid to Distributions Paid to Partners' Per December 31, General Partners Limited Partners Unit Amount ------------ --------------------- --------------------- ------------- 1994 $ 14,590 $1,444,300 $26.26 ========== ========== ====== 1995 $ 14,917 $1,476,750 $26.85 ========== ========== ====== 1996: Quarterly distributions: $ 14,802 $1,465,426 $26.68 Special distribution 823,500 15.00 ---------- ---------- ------ Total 1996 $ 14,802 $2,288,926 $41.68 ========== ========== ======
Distributions of $3,532 to the General Partners and $349,713 to the Limited Partners for the quarter ended December 31, 1996 were declared and paid in January 1997. 8. Income for Federal Tax Purposes: Income for financial statement purposes differs from income for Federal income tax purposes because of the difference in the treatment of certain items for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows: Continued -13- 12 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
1994 1995 1996 ---- ---- ---- Net income per Statements of Income $ 1,732,055 $2,596,081 $2,624,782 Excess tax depreciation (630,883) (612,649) (368,687) Writedown to net realizable value 445,551 Restructuring fee 3,237,685 Other (138,363) (106,511) (288,538) ----------- ---------- ---------- Income reported for Federal income tax purposes $ 1,408,360 $5,114,606 $1,967,557 =========== ========== ==========
9. Industry Segment Information: The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate. In 1994, 1995 and 1996, the Partnership earned its total operating revenues (rental income plus interest income from direct financing leases) from the following lease obligors:
1994 % 1995 % 1996 % ---------- ---------- ---------- ---------- ---------- ---------- Unisource Worldwide, Inc. $1,314,240 27% $1,316,677 27% $1,316,677 29% Pre Finish Metals Incorporated 891,558 18 937,772 19 967,600 21 Gibson Greetings, Inc. 1,847,712 37 1,708,392 35 823,776 18 Cleo, Inc. 46,763 1 444,576 10 AT&T Corporation 295,429 6 295,728 6 296,066 7 New Valley Corporation 410,266 8 237,162 5 236,784 5 Other 113,807 2 206,959 4 171,169 4 Maybelline Products Co., Inc. 143,000 3 156,000 3 B & G Contract Packaging, Inc. 126,000 3 Family Dollar Stores, Inc. 78,000 2 ---------- ---------- --------- ---------- ---------- ---------- $4,951,012 100% $4,892,453 100% $4,538,648 100% ========== ========== ========== ========== ========== ==========
10. Properties Formerly Leased to New Valley Corporation: The Partnership and Corporate Property Associates 3 ("CPA(R):3"), an affiliate, own 39% and 61% interests, respectively, in three properties located in Reno, Nevada; Bridgeton, Missouri; and Moorestown, New Jersey. Until May 1993, the three properties were leased to New Valley Corporation ("New Valley"). On April 1, 1993, New Valley filed a petition of voluntary bankruptcy seeking reorganization under Chapter 11 of the United States Bankruptcy Code. In connection with the bankruptcy filing, the Bankruptcy Court approved New Valley's termination of its lease with the Partnership and CPA(R):3 for the Moorestown, New Jersey property in May 1993. In December 1994, the Bankruptcy Court also approved the termination of New Valley's lease on the Reno property effective December 31, 1994. In connection with the lease termination, the Partnership wrote down the Reno property in 1994 to its estimated net realizable value of $1,295,000 and recognized a charge of $445,551 on the writedown. New Valley continues to lease the Bridgeton property. Continued -14- 13 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS, Continued In 1995 the Partnership and CPA(R):3 entered into a lease agreement with Sports & Recreation, Inc. ("Sports & Recreation") for the Moorestown property. The agreement provided that after conversion of the facility into a retail store, a lease term of 16 years with an initial rent of $308,750 (of which the Partnership's share is $121,000) would commence. During 1996 Sports & Recreation indicated to the Partnership and CPA(R):3 that it had decided not to occupy the property and would seek to terminate the lease. At that time, the Partnership and CPA(R):3 rejected as inadequate Sports & Recreation's offer of $300,000 as a settlement in exchange for being released from its lease obligations. Sports & Recreation has paid all scheduled rents. The Partnership and CPA(R):3 expect that Sports & Recreation will resume discussions for the purposes of reaching a termination settlement; however, no discussions are currently in progress. On August 28, 1996 the Partnership and CPA(R):3 entered into a lease agreement for the Reno property with Excel Teleservices, Inc. ("Excel"). The lease obligations of Excel have been guaranteed by its parent company, Excel Telecommunications, Inc. The initial lease term commenced on December 26, 1996. Annual rent during the first five years is $532,800 increasing to $580,800 thereafter (of which the Partnership's share is $207,800 and $226,600, respectively). The lease, which has a term of ten years, provides Excel with two five-year renewal options with the rent during such renewal terms based on the then prevailing market rate. Excel has the right to terminate the lease at the end of the sixth lease year. In connection with the termination of the Moorestown and Reno leases, the Partnership and CPA(R):3 expect to receive a bankruptcy settlement from New Valley. The amount of such settlement cannot be estimated and no amounts that the Partnership may ultimately receive have been recorded in the accompanying financial statements. 11. Properties Leased to Gibson Greetings, Inc.: In January 1982, the Partnership and CPA(R):3 entered into a net lease with Gibson Greetings, Inc. ("Gibson"), for three properties in Memphis, Tennessee; Berea, Kentucky; and Cincinnati, Ohio. In 1988, the Partnership and CPA(R):3 consented to Gibson's sublease of the Memphis, Tennessee property to a wholly-owned subsidiary, Cleo, Inc. ("Cleo"). The lease for the three properties had an initial term of 20 years with two five-year renewal options and provided for minimum annual rentals of $5,865,000 with rent increases every five years based on a formula indexed to the CPI. The lease also provided Gibson with a purchase option which was exercisable during the tenth year of the lease and at the end of the initial term. Gibson declined to exercise its purchase option in 1992. In connection with Gibson's sale of the Cleo subsidiary to CSS Industries, Inc. ("CSS"), the Partnership, CPA(R):3 and Gibson entered into an agreement on November 15, 1995, whereby the Memphis, Tennessee property occupied by Cleo was severed from the Gibson master lease, the Gibson lease was amended and Cleo entered into a separate lease for the Tennessee property with CSS as the guarantor of Cleo's lease obligations. The Partnership and CPA(R):3 received $12,200,000 (of which the Partnership's share was $3,477,000) as a one-time lump sum payment in consideration for severing the Tennessee property from the Gibson master lease. Gibson still retains certain specific obligations for any environmental violations which may be detected and which resulted from any pre-existing conditions at the Tennessee property. The Gibson lease on the two remaining properties in Kentucky and Ohio, as amended, provides for an initial term which has been extended through November 30, 2013, and provides for one renewal term of ten years. Annual rent is $3,100,000 (of which the Partnership's share is approximately $733,000), with stated increases of 20% every five years through the end of the Continued -15- 14 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS, Continued renewal term. The lease includes new purchase options exercisable on November 30, 2005 and 2010 and Gibson has the right to exercise the purchase option on either one of its leased properties or both. The option is exercisable at fair market value of the properties as encumbered by the lease. The Cleo lease provides for a ten-year term through December 31, 2005 with two five-year renewal terms. Annual rent is $1,500,000 (of which the Partnership's share is approximately $355,000), and there is a rent increase effective January 1, 2001. The rent increase will be based on a formula indexed to the CPI; however, the increased annual rent will be at least $1,689,000 but no more than $1,898,000. Cleo has an option to purchase the property at any time during the term of the lease so long as there is no event of monetary default. Exercise of the purchase option requires at least six months' notice. The exercise price is the greater of (i) $15,000,000 or (ii) fair market value capped at a maximum of $16,250,000. In connection with the payment made by Gibson to sever the Tennessee property from the Gibson lease, the Partnership deferred recognition of a gain on restructuring of $3,237,685, consisting of the Partnership's $3,477,000 share of the lump sum payment offset by costs of $239,315 including management fees of $173,000, payable to an affiliate. The Partnership is amortizing such deferral over the remaining initial terms of the Gibson and Cleo leases. The net proceeds from the agreement as well as other available funds were used to pay off the Partnership's share of the mortgage loan collateralized by the Gibson properties of $6,153,000 in November 1995. 12. Environmental Matters: All of the Partnership's properties are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. All of the Partnership's properties are currently leased to corporate tenants. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. The costs for remediation, which are being performed and paid for by the affected tenant at three of the properties, are not expected to be material. In the event that the Partnership absorbs a portion of such costs because of a tenant's failure to fulfill its obligations, the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations. In 1994, based on the results of Phase I environmental reviews performed in 1993, the Partnership voluntarily conducted Phase II environmental reviews on four of its properties. The Partnership believes, based on the results of such Phase I and Phase II reviews, that its properties are in substantial compliance with Federal and state environmental statutes and regulations. Portions of certain properties have been documented as having a limited degree of contamination, principally in connection with either leakage from underground storage tanks or surface spills from facility activities. For those conditions which were identified, the Partnership advised the affected tenant of the Phase II findings and of its obligation to perform required remediation. 13. Disclosures About Fair Value of Financial Instruments: The carrying amounts of cash, receivables and accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The Partnership estimates that the fair value of the Partnership's two mortgage notes payable approximates the carrying amount of such mortgage notes at December 31, 1996. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates which take into account the credit of the tenants and interest rate risk. Continued -16- 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) BY: W. P. CAREY & CO., INC. 09/3/97 BY: /s/ Steven M. Berzin - --------------- ------------------------------ Date Claude Fernandez Executive Vice President and Chief Financial Officer (Principal Financial Officer) 09/3/97 BY: /s/ Claude Fernandez - --------------- ------------------------------ Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) -17- -----END PRIVACY-ENHANCED MESSAGE-----