-----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, KSNwbKUthGZAswego6/3lGVanm3MvHZ1yWg4ejlAjLYoUa2pBFO7h76Wts2jDOtR ovO6ISaFmUPDlTyDP1C6NA== 0000950123-98-002874.txt : 19980326 0000950123-98-002874.hdr.sgml : 19980326 ACCESSION NUMBER: 0000950123-98-002874 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 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 SEC ACT: SEC FILE NUMBER: 000-09727 FILM NUMBER: 98572708 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 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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, 1997 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 (I.R.S. Employer incorporation or organization) 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: SUBSIDIARY 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 (ss. 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 Subsidiary Partnership Units. 2 PART I Item 1. Business. Registrant is engaged in the business of investing in commercial and industrial real estate properties which are net leased to commercial and industrial entities. Registrant was organized as a California limited partnership on August 9, 1979. Effective January 1, 1998, the General Partner of Registrant is Carey Diversified LLC ("Carey Diversified"). W. P. Carey & Co., Inc. and William Polk Carey were formerly the Corporate General Partner and the Individual General Partner, respectively. Carey Diversified is also the General Partner of Corporate Property Associates ("CPA(R):1"), Corporate Property Associates 3 ("CPA(R):3"), Corporate Property Associates 4, a California limited partnership ("CPA(R):4"), Corporate Property Associates 5 ("CPA(R):5"), Corporate Property Associates 6 - a California limited partnership ("CPA(R):6"), Corporate Property Associates 7 - a California limited partnership ("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited partnership ("CPA(R):8") and Corporate Property Associates 9, L.P., a Delaware limited partnership ("CPA(R):9"). Registrant has entered into an agreement with Carey Management LLC ("Carey Management") pursuant to which Carey Management performs a variety of management services for Registrant. Registrant has only one industry segment which consists of the investment in and the leasing of industrial and commercial real estate. See Selected Financial Data in Item 6 for a summary of Registrant's operations. Also see the material contained in the Prospectus of Registrant dated January 18, 1980 under the heading INVESTMENT OBJECTIVES AND POLICIES. The properties owned by Registrant are described in Item 2. Registrant's entire net proceeds from the public offering, less any return of capital and a working capital reserve have been fully invested in net leased commercial and industrial real estate since November 30, 1982, the date of Registrant's final real estate acquisition. For the year ended December 31, 1997, revenues from properties occupied by tenants which accounted for 10% or more of operating revenue were as follows: Unisource Worldwide, Inc. ("Unisource"), 27%; Pre Finish, Metals, Inc. ("Pre Finish"), 20% and Gibson Greetings, Inc., 17%. No other property owned by Registrant accounted for 10% or more of its total operating revenues during 1997. See Note 9 to the Financial Statements in Item 8. Unisource and Material Sciences Corporation ("MSC"), guarantor of Pre Finish's lease obligations, are publicly traded companies. For the fiscal year ended September 30, 1997, Unisource's audited financial statement reported revenues of $7,108,400,000, net income of $58,700,000, total assets of $2,558,000,000 and shareholders' equity of $984,400,000. MSC's audited financial statements for the year ended February 28,1997 reported net sales of $278,017,000, net income of $16,236,000, total assets of $254,089,000 and shareholders' equity of $133,373,000. All of Registrant's real estate properties are leased to corporate tenants under net leases. A net lease generally requires tenants to pay all operating expenses relating to the leased properties including maintenance, real estate taxes, insurance and utilities which under other forms of leases are often paid by the lessor. Lessees are required to include Registrant as an additional insured party on all insurance policies relating to the leased properties. In addition, substantially all of the net leases include indemnification provisions which require the lessees to indemnify Registrant and the General Partner for liabilities on all matters related to the leased properties. Registrant believes that the insurance and indemnity provided on its behalf by its lessees provides adequate coverage for property damage and any liability claims which may arise against Registrant's ownership interests. In addition to the insurance and indemnification provisions of the leases, Registrant has contingent property and liability insurance for its leased properties and primary property -1- 3 and liability for its property in Maumelle, Arkansas which is reimbursed by tenants. To the extent that any lessees are not financially able to satisfy indemnification obligations which exceed insurance reimbursements, Registrant may incur the costs necessary to repair properties and settle liabilities. As described above, lessees retain the obligation for the operating expenses of their leased properties so that, other than rental income, there are no significant operating data (i.e. expenses) reportable on Registrant's leased properties. As discussed in Registrant's Management's Discussion and Analysis in Item 7, Registrant's leases generally provide for periodic rent increases which are either stated and negotiated at the inception of the lease or based on formulas indexed to increases in the Consumer Price Index. Registrant's leases have initial lease terms which generally end between 2001 and 2013 with such leases providing for multiple renewal terms of generally five or ten years. Registrant's leases with Pre Finish, Unisource, Gibson and Cleo, Inc. include purchase options which provide for purchase of leased properties exercisable at the greater of fair market value, as defined in the lease, or a stated amount. No purchase options are exercisable until June 1998. As described in Note 10 to the Financial Statements in Item 8, in connection with the bankruptcy claim of Registrant and CPA(R):3 against New Valley Corporation ("New Valley"), the Bankruptcy Court entered a judgment in January 1998 which awarded Registrant and CPA(R):3: $2,900,000 (of which Registrant's share is $1,130,000) on their claim. New Valley has elected to appeal the Bankruptcy Court's judgment to the United States District Court for the District of New Jersey (Newark). The Partnership and CPA(R):3 have cross-appealed on different issues. Since Registrant's objective has been to invest in properties which are occupied by a single corporate tenant and subject to long-term net leases backed by the credit of the corporate lessee, Registrant's properties have not been generally subject to the competitive conditions of local and regional real estate markets. In selecting its real estate investments, Registrant's strategy was to identify properties which included operations of material importance to the lessee so that the lessee would be more likely to extend its lease beyond the initial term or exercise a purchase option if such option was provided for in the lease agreement. Registrant believes that this strategy reduces its exposure to the competitive conditions of the local and regional real estate markets. Because Registrant may be affected by the financial condition of its lessees rather than the competitive conditions of the real estate marketplace, Registrant's strategy has been to diversify its investments among tenants, property types and industries in addition to achieving geographical diversification. Registrant voluntarily performed initial environmental reviews of all of its properties in 1993. Registrant believes, based on the results of such reviews and Phase II environmental reviews of four of its properties in 1994, that its properties are in substantial compliance with Federal and state environmental statutes and regulations. Phase II reviews were performed only on certain properties based on the recommendations of the Phase I reviews. Portions of certain properties have been subject to a limited degree of contamination, principally in connection with either leakage from underground storage tanks or surface spills from facility activities. In many instances, tenants are actively engaged in the remediation process and addressing identified conditions. For those conditions which were identified, Registrant advised its tenants of such findings and of their obligations to perform additional investigations and any required remediation. Tenants are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. In addition, Registrant's leases generally require tenants to indemnify Registrant from all liabilities and losses related to the leased properties. Accordingly, Management believes that the ultimate resolution of the aforementioned environmental matters will not have a material adverse effect on Registrant's financial condition, liquidity or results of operations. On October 16, 1997, Registrant distributed a Consent Solicitation Statement/Prospectus to the Limited Partners that described a proposal to consolidate Registrant with the other CPA(R) Partnerships. Proposals that each of the nine CPA(R) limited partnerships be merged with a corresponding subsidiary partnership of Carey Diversified, of which Carey Diversified is the general partner, were approved by the Limited Partners of all nine of the CPA(R) limited partnerships. Each limited partner had the option of either exchanging his or her limited partnership interest for an interest in Carey Diversified ("Listed Shares") or to retain a limited partnership interest in the subsidiary partnership ("Subsidiary Partnership Units"). On January - 2 - 4 1, 1998, 1,937 holders representing 54,227 of the 54,900 limited partnership units exchanged such units for 1,516,187 Listed Shares with 29 holders of the remaining 673 limited partnership units exchanging such units for Subsidiary Partnership Units. The former General Partners received 158,192 Listed Shares for their interest in their share of the appreciation in Registrant properties. The Listed Shares are listed on the New York Stock Exchange. The Subsidiary Partnership Units provide substantially the same economic interest and legal rights as those of a limited partnership unit in Registrant prior to the Consolidation, but are not listed on a securities exchange. A liquidating distribution to holders of Subsidiary Partnership Units will be made after an appraisal of Registrant's properties. The date of such an appraisal is to be no later than December 31, 1998. Registrant does not have any employees. Carey Management, an affiliate of the General Partner of Registrant performs accounting, secretarial and transfer services for Registrant. Chase Mellon Shareholder Services, Inc. also performs certain transfer services for Registrant and The Chase Manhattan Bank performs certain banking services for Registrant. In addition, Registrant has entered into an agreement with Carey Management pursuant to which Carey Management provides certain management services to Registrant. Registrant's management company has responsibility for maintaining the company's books and records. An affiliate of the management company services the computer systems used in maintaining such books and records. In its preliminary assessment of Year 2000 issues, the affiliate believes that such issues will not have a material effect on the Registrant's operations; however, such assessment has not been completed. Registrant relies on its bank and transfer agent for certain computer-related services and has initiated discussions to determine whether they are addressing Year 2000 issues that might affect the Registrant. - 3 - 5 Item 2. Properties. Registrant's properties are as follows:
LEASE TYPE OF OWNERSHIP OBLIGOR TYPE OF PROPERTY LOCATION INTEREST ------- ---------------- -------- ----------------- GIBSON GREETINGS, Land and Manufacturing Cincinnati, Ownership of a 28.5% INC. Warehouse Buildings Ohio and interest in land and - 2 locations Berea, Kentucky buildings CSS INDUSTRIES, Land and Manufac- Memphis, Ownership of a 28.5% INC./CLEO, INC. turing/Warehouse Tennessee interest in land and Building buildings UNISOURCE Land and Office/ City of Commerce, 100% interest in LLC WORLDWIDE, Warehouse/Distri- California which owns land INC. bution Center and building (1) WESTERN UNION Land and Bridgeton, Ownership of an FINANCIAL SERVICES, Centralized Missouri approximate 39% INC. Telephone Bureau interest in land and buildings SPORTS & Land and Moorestown, Ownership of an RECREATION, Building New Jersey approximate 39% INC. interest in land and buildings AT&T CORPORATION Land and a Bridgeton, Ownership of an Computer Center Missouri approximate 39% interest in land and building EXCEL TELE- Land and Reno, Ownership of an COMMUNICATIONS, Building Nevada approximate 39% INC. interest in land and buildings PRE FINISH METALS Land and Warehouse/ Walbridge, Ohio Ownership of a 40% INCORPORATED Manufacturing Plant interest in land and building (1) B&G CONTRACT Land and Warehouse/ Maumelle, Ownership of land PACKAGING, INC. Distribution Center Arkansas and building WEXLER AND WEXLER Land and Retail New Orleans, Ownership of land Stores Louisiana and building A. JONES Land and Retail Greensboro, North Ownership of land Stores Carolina and building KINKOS OF OHIO, INC. Land and Retail Store Canton, Ohio Ownership of land (on adjacent sites) and building
(1) These properties are encumbered by mortgage notes payable. - 4 - 6 The material terms of Registrant's leases with its significant tenants are summarized in the following table:
Registrant's Share Current Lease Lease of Current Square Rent Per Expiration Renewal Ownership Obligor Annual Rents Footage Sq.Ft.(1) (Mo./Year) Terms Interest Terms of Purchase Option - ------- ------------ ------- --------- ---------- ----- -------- ------------------------ Gibson $ 733,429 1,194,840 2.59 04/2010 YES 28.5% interest as Fair market value as Greetings, tenant-in-common; encumbered by the Inc. remaining interest lease. owned by Corporate Property Associates 3 ("CPA(R):3") CSS 345,600 1,006,566 1.49 12/2005 YES 28.5% interest as tenant- The greater of fair Industries, in-common; remaining market value or Inc./Cleo, interest owed by CPA(R):3 $4,275,000. Fair Inc. market value is capped at $4,631,250. Unisource 1,292,800 411,579 3.14 04/2010 YES 100% The greater of Worldwide, fair market Inc. (3) value of the property or $10,744,680. New Valley 257,632 78,080 8.41 11/2001 YES 39% interest; N/A Corporation as tenant-in- common, remaining interest owned by CPA(R):3 AT&T 311,709 55,810 14.24 11/2001 YES 39% interest; N/A Corporation as tenant-in- common, remaining interest owned by CPA(R):3 Pre Finish 968,639 (2) 313,704 7.72 06/2003 YES 40% interest; The greater of Metals as tenant-in- fair market Incorporated common, value of the (3) remaining property or interest owned $5,248,817 plus by Corporate 2 1/2% thereof per Property annum, not compounded, Associates from 12/9/80 to the closing date. Sports & 121,093 74,066 4.17 05/2012 YES 39% interest; as tenant-in- N/A Recreation, common interest owed by Inc. CPA(R):3 Excel 208,966 53,158 10.02 12/2002 YES 39% interest; N/A Commun- as tenant-in- ications, Inc. common, remaining interest owned by CPA(R):3
(1) Represents rate for rent per square foot when combined with rents applicable to tenants-in-common. (2) Partnership's share of equity rent of $331,403 plus variable debt rent (3) These properties are encumbered by limited recourse mortgages. - 5 - 7 Item 3. Legal Proceedings. As of the date hereof, Registrant is not a party to any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. Information with respect to matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1997 is hereby incorporated by reference to Page 22 of Registrant's Annual Report contained in Appendix A. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information with respect to Registrant's common equity is hereby incorporated by reference to page 22 of Registrant's Annual Report contained in Appendix A. Item 6. Selected Financial Data. Selected Financial Data are hereby incorporated by reference to page 1 of Registrant's Annual Report contained in Appendix A. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 4 of Registrant's Annual Report contained in Appendix A. Item 8. Consolidated Financial Statements and Supplementary Data. The following financial statements and supplementary data are hereby incorporated by reference to pages 5 to 17 of Registrant's Annual Report contained in Appendix A. (i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 1997 and 1997. (iii) Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997. (iv) Consolidated Statements of Partners' Capital for the years ended December 31, 1995, 1996 and 1997. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997. (vi) Notes to Consolidated Financial Statements. Item 9. Disagreements on Accounting and Financial Disclosure. NONE - 6 - 8 PART III Item 10. Directors and Executive Officers of the Registrant. Registrant has no officers or directors. The directors and executive officers of the General Partner, Carey Diversified LLC, are as follows:
Has Served as a Director and/or Name Age Positions Held Officer Since (1) ---- --- -------------- ----------------- Francis J. Carey 72 Chairman of the Board 1/98 Chief Executive Officer Director William Polk Carey 67 Chairman of the Executive Committee 1/98 Director Steven M. Berzin 47 Vice Chairman 1/98 Chief Legal Officer Director Gordon F. DuGan 31 President 1/98 Chief Acquisitions Officer Director Donald E. Nickelson 64 Chairman of the Audit Committee 1/98 Director Eberhard Faber, IV 61 Director 1/98 Barclay G. Jones III 37 Director 1/98 Lawrence R. Klein 77 Director 1/98 Charles C. Townsend, Jr. 69 Director 1/98 Reginald Winssinger 55 Director 1/98 Claude Fernandez 45 Executive Vice President 1/98 - Financial Operations John J. Park 33 Executive Vice President 1/98 Chief Financial Officer Treasurer H. Augustus Carey 40 Senior Vice President 1/98 Secretary Samantha K. Garbus 29 Vice President - Asset Management 1/98 Susan C. Hyde 29 Vice President - Shareholder Services 1/98 Robert C. Kehoe 37 Vice President - Accounting 1/98 Edward V. LaPuma 24 Vice President - Acquisitions 1/98
William Polk Carey and Francis J. Carey are brothers. H. Augustus Carey is the nephew of William Polk Carey and the son of Francis J. Carey. - 7 - 9 A description of the business experience of each officer and director of the Corporate General Partner is set forth below: Francis J. Carey, Chairman of the Board, Chief Executive Officer and Director, was elected President and a Managing Director of W. P. Carey & Co. ("W.P. Carey") in April 1987, having served as a Director since its founding in 1973. Prior to joining the firm full-time, he was a senior partner in Philadelphia, head of the Real Estate Department nationally and a member of the executive committee of the Pittsburgh based firm of Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships, W.P. Carey and some of its affiliates. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990. He has also served as a member of the Board of Trustees of the Investment Program Association since 1990 and on the Business Advisory Council of the Business Council for the United Nations since 1994. He holds A.B. and J.D. degrees from the University of Pennsylvania. Gordon F. DuGan, President, Chief Acquisitions Officer and Director, was elected Executive Vice President and a Managing Director of W.P. Carey in June 1997. Mr. Dugan rejoined W.P. Carey as Deputy Head of Acquisitions in February 1997. Mr. Dugan was until September 1995 a Senior Vice President in the Acquisitions Department of W.P. Carey. Mr. Dugan joined W.P. Carey as Assistant to the Chairman in May 1988, after graduating from the Wharton School at the University of Pennsylvania where he concentrated in Finance. From October 1995 until February 1997, Mr. Dugan was Chief Financial Officer of Superconducting Core Technologies, Inc., a Colorado-based wireless communications equipment manufacturer. Steven M. Berzin, Vice Chairman, Chief Legal Officer and Director, was elected Executive Vice President, Chief Financial Officer, Chief Legal Officer and a Managing Director of W.P. Carey in July 1997. From 1993 to 1997, Mr. Berzin was Vice President - Business Development of General Electric Capital Corporation in the office of the Executive Vice President and, more recently, in the office of the President, where he was responsible for business development activities and acquisitions. From 1985 to 1992, Mr. Berzin held various positions with Financial Guaranty Insurance Company, the last two being Managing Director, Corporate Development and Senior Vice President and Chief Financial Officer. Mr. Berzin associated with the law firm of Cravath, Swaine & Moore from 1978 to 1985 and from 1976 to 1977, he served as law clerk to the Honorable Anthony M. Kennedy, then a United States Circuit Judge. Mr. Berzin received a B.A. and M.A. in Applied Mathematics from Harvard University, a B.A. in Jurisprudence and an M.A. from Oxford University and a J.D. from Harvard Law School.. Donald E. Nickelson, Chairman of the Audit Committee and Director, serves as Chairman of the Board and a Director of Greenfield Industries, Inc. and a Director of Allied Healthcare Products, Inc. Mr. Nickelson is Vice-Chairman and a Director of the Harbor Group, a leverage buy-out firm. He is also a Director of Sugen Corporation and D.T.I. Industries, Inc. and a Trustee of mainstay Mutual Fund Group. From 1986 to 1988, Mr. Nickelson was President of PaineWebber Incorporated; from 1988 to 1990, he was President of the PaineWebber Group; and from 1980 to 1993 a Director. Prior to 1986, Mr. Nickelson served in various capacities with affiliates of PaineWebber Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a Director of a diverse group of corporations in the manufacturing, service and retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles, Inc. and Motor Wheel Corporation. He is a former Chairman of National Car Rentals, inc. Mr. Nickelson is also a former Director of the Chicago Board Options Exchange and is the former Chairman of the Pacific Stock Exchange. William Polk Carey, Chairman of the Executive Committee and Director, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey is a Governor of the National Association of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University, The James A. Baker III Institute for Public Policy at Rice University, Templeton College of - 8 - 10 Oxford University and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that University. Mr. Carey is also a Director of CPA(R):10, CIP(TM) and CPA(R):12. Eberhard Faber IV, is currently a Director of PNC Bank, N.A., Chairman of the Board and Director of the newspaper Citizens Voice, a Director of Ertley's Motorworld, Inc., Vice-Chairman of the Board of King's College and a Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and Chief Executive Officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber also served as the Director of the Philadelphia Federal Reserve Bank, including service as the Chairman of its Budget and Operations Committee from 1980 to 1986. Mr. Faber has served on the boards of several companies, including First Eastern bank from 1980 to 1993. Barclay G. Jones III, Executive Vice President, Managing Director, and head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York. Lawrence R. Klein, Director, is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania, having joined the faculty of Economics and the Wharton School in 1958. He holds earned degrees from the University of California at Berkeley and Massachusetts Institute of Technology and has been awarded the Nobel Prize in Economics as well as over 20 honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to various corporations, governments, and government agencies including the Federal Reserve Board and the President's Council of Economic Advisers. Charles C. Townsend, Jr., Director, currently is an Advisory Director of Morgan Stanley & Co., having held such position since 1979. Mr. Townsend was a Partner and a Managing Director of Morgan Stanley & Co. from 1963 to 1978 and served as Chairman of Morgan Stanley Realty Corporation from 1977 to 1982. Mr. Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from Harvard University. Mr. Townsend serves as Director of CIP(TM) and CPA(R)14. Reginald Winssinger, Director, is currently Chairman of the Board and Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed portfolios of diversified real estate assets exceeding $500 million throughout the United States for more than 20 years. Mr. Winssinger is active in the planning and development of major land parcels and has developed 20 commercial properties. Mr. Winssinger is a native of Belgium with more than 25 years of real estate practice, including 10 years based in Brussels, overseeing appraisals, construction and management. Mr. Winssinger holds a B.S. in Geography from the University of California at berkeley and received a degree in Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary Belgium Consul to the State of Arizona, a position he has held since 1991. Claude Fernandez, Executive Vice President - Financial Operations, joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a Certified Public Accountant. Mr. Fernandez received a B.S. degree in accounting from New York University in 1975 and his M.B.A. in Finance from Columbia University Graduate School of Business in 1981. John J. Park, Executive Vice President, Chief Financial Officer and Treasurer, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park received his undergraduate degree from Massachusetts Institute of Technology and his M.B.A. in Finance from New York University. H. Augustus Carey, Senior Vice President and Secretary, returned to W.P. Carey in 1988 and is President of W.P. Carey's broker-dealer subsidiary. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council. - 9 - 11 Samantha K Garbus, Vice President - Director of Asset Management, became a Second Vice President of W.P. Carey in April 1995 and a Vice President in April 1997. Ms. Garbus joined W. P. Carey as a Property Management Associate in January 1992. Ms. Garbus received a B.A. in History from Brown University in May 1990 and an M.B.A. from the Stern School of New York University in January 1997. Susan C. Hyde, Vice President - Director of Shareholder Services, joined W. P. Carey in 1990, became a Second Vice President in April 1995 and a Vice President in April 1997. Ms. Hyde graduated from Villanova University in 1990 where she received a B.S. in Business Administration with a concentration in Marketing and a B.A. in English. Robert C. Kehoe, Vice President - Accounting, joined W.P. Carey as a Senior Accountant in 1987. Mr. Kehoe became a Second Vice President of W. P. Carey in April 1992 and a Vice President in July 1997. Prior to joining the company, Mr. Kehoe was associated with Deloitte, Haskins & Sells for three years and was Manager of Financial Controls at CBS Educational and Professional Publishing for two years. Mr. Kehoe received a B.S. in Accounting from Manhattan College in 1982 and an M.B.A. in Finance from Pace University in 1993. Edward V. LaPuma, Vice President - Acquisitions, joined W. P. Carey as an Assistant to the Chairman in July 1995, became a Second Vice President in July 1996 and a Vice President in April 1997. A graduate of the University of Pennsylvania, Mr. LaPuma received a B.A. in Global Economic Strategies from The College of Arts and Sciences and a B.S. in Economics with a Concentration in Finance from the Wharton School. Item 11. Executive Compensation. Until January 1, 1998, under the Amended Agreement of Limited Partnership of Registrant (the "Agreement"), 9/10th of 1% of Distributable Cash From Operations was payable to the former Corporate General Partner and 1/10 of 1% of Distributable Cash From Operations, as defined, was payable to the former Individual General Partner. The former Corporate General Partner and the former Individual General Partner received $12,747 and $1,416, respectively, from Registrant as their share of Distributable Cash From Operations during the year ended December 31, 1997. As owner of 200 Limited Partnership Units, the former Corporate General Partner received cash distributions of $5,108 during the year ended December 31, 1997. See Item 6 for the net income allocated to the General Partners under the Agreement. Registrant is not required to pay, and has not paid, any remuneration to the officers or directors of the former Corporate General Partner or any other affiliate of Registrant during the year ended December 31, 1997. In the future, a special limited partner, Carey Management LLC will receive 9/10th of 1% of Distributable Cash From Operations, William Polk Carey will receive, as a special limited partner, 1/10th of 1% of Distributable Cash From Operations and each will be allocated the same percentage of the profits and losses of Registrant. Item 12. Security Ownership of Certain Beneficial Owners and Management. As of December 31, 1997, no person owned of record, or was known by Registrant to own beneficially more than 5% of the Registrant. - 10 - 12 The following table sets forth as of March 20, 1998 certain information as to the ownership by directors and executive officers of securities of the General Partner of Registrant:
Number of Listed Name of Shares and Nature of Percent Title of Class Beneficial Owner Beneficial Ownership of Class - -------------- ---------------- -------------------- -------- Listed Shares William Polk Carey Francis J. Carey Steven M. Berzin Gordon F. DuGan Donald E. Nickelson Eberhard Faber IV Barclay G. Jones III Lawrence R. Klein Charles C. Townsend, Jr. Reginald Winssinger John J. Park Claude Fernandez H. Augustus Carey Susan K. Garbus Susan C. Hyde Robert C. Kehoe Edward V. LaPuma All executive officers and directors as a group (17 persons)
In connection with Consolidation of Registrant into Carey Diversified LLC, effective January 1, 1998, no officer or director, other than William Polk Carey, owns a direct interest in Registrant. William Polk Carey owns a 0.1% interest in Registrant as a special limited partner and has a controlling interest in Carey Management LLC which owns a 0.9% interest in Registrant as a special limited partner. Effective January 1, 1998, Carey Diversified owns an approximate 98% interest in Registrant. There exists no arrangement, known to Registrant, the operation of which may at a subsequent date result in a change of control of Registrant. Item 13. Certain Relationships and Related Transactions. For a description of transactions and business relationships between Registrant and its affiliates and their directors and officers, see Notes 2 and 3 to the Financial Statements in Item 8. Michael B. Pollack, Senior Vice President and Secretary of the Corporate General Partner and certain of its affiliates, is a partner of Reed Smith Shaw & McClay which is engaged to perform legal services for Registrant. Mr. Pollack was the Secretary, until July 1997, of the former Corporate General Partner. No officer or director of the Corporate General Partner or any other affiliate of Registrant or any member of the immediate family or associated organization of any such officer or director was indebted to Registrant at any time since the beginning of Registrant's last fiscal year. - 11 - 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Consolidated Financial Statements: The following consolidated financial statements are filed as a part of this Report: Report of Independent Accountants. Consolidated Balance Sheets, December 31, 1996 and 1997. Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997. Consolidated Statements of Partners' Capital for the years ended December 31, 1995, 1996 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997. Notes to Consolidated Financial Statements. The financial statements are hereby incorporated by reference to pages 5 to 17 of Registrant's Annual Report contained in Appendix A. (a) 2. Financial Statement Schedule: The following schedule is filed as a part of this Report: Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997. Notes to Schedule III. Schedule III and notes thereto are hereby incorporated by reference to pages 18 to 20 of Registrant's Annual Report contained in Appendix A. Financial Statement Schedules other than those listed above are omitted because the required information is given in the Consolidated Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist. - 12 - 14 (a)3. Exhibits: The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit Method of No. Description Filing - ------- ----------- ------ 3.1 Amended Agreement of Limited Partnership of Exhibit 3(B) to Regis- Registrant dated as of November 1, 1979. tration Statement (Form S-11) No. 2-65357 3.2 Amendment No. 1 dated April 29, 1980 to Exhibit 12 to Form 8-K Amended Agreement of Limited Partnership filed May 12, 1980 of Registrant. 4.36 $11,000,000 Note dated May 30, 1986 Exhibit 4.2 to Form 8-K from Creditanstalt-Bankverein dated July 14, 1986 ("Creditanstalt"), as Lender, to the Registrant and CPA(R):1, as Borrower. 4.37 Note Purchase Agreement dated as of Exhibit 4.3 to Form 8-K May 30, 1986 between Material dated July 14, 1986 Sciences Corporation ("MSC"), as Purchaser, and Creditanstalt, as Lender. 4.38 Letter dated June 27, 1986 from Exhibit 4.4 to Form 8-K Registrant and CPA(R):1 to Pre Finish dated July 14, 1986 Metals Incorporated ("PFM") and MSC regarding Note Purchase Agreement. 4.39 Mortgage and Security Agreement Exhibit 4.5 to Form 8-K dated as of May 30, 1986 between dated July 14, 1986 Registrant and CPA(R):1, as Mortgagor, and Creditanstalt, as Mortgagee and Secured Party. 4.40 Assignment of Agreements dated as of Exhibit 4.6 to Form 8-K May 30, 1986 from the Registrant and dated July 14, 1986 CPA(R):1, as Assignors, to Creditanstalt, as Assignee. 4.41 Assignment of Sublease dated as of Exhibit 4.7 to Form 8-K May 30, 1986 from PFM, as Assignor, dated July 14, 1986 to the Registrant and CPA(R):1, as Assignees. 4.42 Letter Agreement dated June 26, 1986 Exhibit 4.8 to Form 8-K among Creditanstalt, as Lender, and dated July 14, 1986 MSC and PFM.
- 13 - 15
Exhibit Method of No. Description Filing - ------- ----------- ------ 4.43 Joint Tenancy Agreement dated Exhibit 4.9 to Form 8-K May 30, 1986 between Registrant and CPA(R):1. dated July 14, 1986 10.1 Management Agreement between Registrant Exhibit 12(c) to and Carey Corporate Property Management, Registration Statement Inc. (Form S-11) No. 2-65357 10.2 Amendment No. 1 dated April 29, 1980 to Exhibit 13 to Form 8-K Management Agreement between Registrant dated May 12, 1980 and Carey Corporate Property Management, Inc. 10.3 Support Agreement among Registrant, Second Exhibit 12(D) to Regis- Carey Corporate Property, Inc. and W. P. tration Statement (Form Carey & Co., Inc. S-11) No. 2-65357 10.5 Straw Party Agreement by and among Line 6 Exhibit 10.8 to Form 10-K Corp., Registrant and Corporate Property dated March 31, 1982 Associates dated December 11, 1980. 10.6 Lease and Agreement between Line 6 Corp. Exhibit 10.9 to Form 10-K and Pre Finish Metals Incorporated dated March 31, 1982 dated as of December 1, 1980. 10.7 Lease Agreement dated January 25, 1982 Exhibit 1 to Form 8-K between Registrant and CPA(R):3, as dated February 10, 1982 landlord, and Gibson Greeting Cards, Inc., as tenants. 10.8 Indenture of Lease dated September 16, Exhibit 10(H) to Post- 1971 between Western Union Realty Effective Amendment No. 1 Corporation ("WURC"), as landlord, and to Registration Statement The Western Union Telegraph Company (Form S-11) No. 2-70773 ("WUTCO"), as tenant. of Corporate Property Associates 3 ("CPA(R):3") 10.9 Amendment of Lease dated March 27, 1972 Exhibit 10(H)(5) to Post- between WURC and WUTCO. Effective Amendment No. 1 to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.10 Second Amendment of Lease dated Exhibit 10(H)(6) to Post- November 16, 1981 between WURC and Effective Amendment No. 1 WUTCO. to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.11 Assignment of Lease from WUTCO to CPA(R):3 Exhibit 10(H)(7) to Post- and Registrant, as tenants in common, Effective Amendment No. 1 dated November 16, 1981. to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3
- 14 - 16
Exhibit Method of No. Description Filing - ------- ----------- ------ 10.12 Indenture of Lease dated November 14, Exhibit 10(H)(14) to Post- 1972 between WURC, as landlord, and Effective Amendment No. 1 Western Union Corporation ("WUC"), to Registration Statement as tenant. (Form S-11) No. 2-70773 of CPA(R):3 10.13 Amendment of Lease dated December 12, Exhibit 10(H)(15) to Post- 1972 between WURC and WUC. Effective Amendment No. 1 to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.14 Amendment of Lease dated April 30, 1973 Exhibit 10(H)(16) to Post- between WURC and WUC. Effective Amendment No. 1 to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.15 Third Amendment of Lease Agreement dated Exhibit 10(H)(17) to Post- November 12, 1981 between WURC and WUC. Effective Amendment No. 1 to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.16 Assignment of Lease from WURC to CPA(R):3 Exhibit 10(H)(18) to Post- and Registrant, as tenants in common, Effective Amendment No. 1 dated November 16, 1981. to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.17 Indenture of Lease dated July 12, 1972 Exhibit 10(H)(24) to Post- between WURC, as landlord, and WUC, Effective Amendment No. 1 as tenant. to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.18 Amendment of Lease dated March 1, 1973 Exhibit 10(H)(25) to Post- between WURC and WUC. Effective Amendment No. 1 to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.19 Second Amendment of Lease Agreement dated Exhibit 10(H)(26) to Post- November 16, 1981 between WURC and WUC. Effective Amendment No. 1 to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.20 Assignment of Lease from WURC to CPA(R):3 Exhibit 10(H)(27) to Post- and Registrant, as tenants in common, Effective Amendment No. 1 dated November 16, 1981. to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3
- 15 - 17
Exhibit Method of No. Description Filing - ------- ----------- ------ 10.21 Indenture of Lease dated December 18, Exhibit 10(H)(34) to Post- 1973 between WURC, as landlord, and Effective Amendment No. 1 WUC, as tenant. to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.22 Second Amendment of Lease Agreement dated Exhibit 10(H)(35) to Post- November 16, 1981 between WURC and WUC. Effective Amendment No. 1 to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.23 Assignment of Lease from WURC to CPA(R):3 Exhibit 10(H)(36) to Post- and Registrant, as tenants in common, Effective Amendment No. 1 dated November 16, 1981. to Registration Statement (Form S-11) No. 2-70773 of CPA(R):3 10.25 Contract of Sale dated November 16, 1981 Exhibit 10.11 to Form 10-K between Western Union Realty Corporation, dated March 31, 1982 as seller, and Registrant and CPA(R):3, as purchasers. 10.26 Letter of Intent from Registrant to Gibson Exhibit 2.1 to Form 8-K Realty, Inc. and Wesray Packing, Inc. dated October 6, 1982 dated September 22, 1982. 10.27 First Amendment to Lease and Exhibit 10.2 to Form 8-K Agreement dated as of May 30, 1986 dated July 14, 1986 between Registrant and CPA(R):1, as Lessor, and PFM, as Lessee. 10.28 Memorandum of First Amendment to Exhibit 10.3 to Form 8-K Lease and Agreement dated May 30, dated July 14, 1986 1986 between Registrant and CPA(R):1, as Lessor, and PFM, as Lessee 10.29 Letter dated June 30, 1986 from Exhibit 10.4 to Form 8-K Creditanstalt to PFM regarding dated July 14, 1986 Lease as amended by First Amendment to Lease and Agreement, dated May 30, 1986. 10.30 Lease Guaranty dated as of May 30, Exhibit 10.5 to Form 8-K 1986 from MSC to Registrant and dated July 14, 1986 CPA(R):1 and Creditanstalt. 10.31 Sublease dated as of May 30, 1986 Exhibit 10.6 to Form 8-K between PFM and Walbridge Coatings dated July 14, 1986 ("Walbridge"). 10.32 Memorandum of Sublease dated as of Exhibit 10.7 to Form 8-K May 30, 1986 by and between PFM and dated July 14, 1986 Walbridge. 10.33 Letter of Agreement dated November 24, 1992 Exhibit 10.1 to Form 8-K between Registrant and Heekin Can, Inc. dated December 10, 1992
- 16 - 18
Exhibit Method of No. Description Filing - ------- ----------- ------ 10.34 Lease Agreement dated November 15, 1995 Exhibit 10.34 to Form 10-K by and between Registrant and CPA(R):3, dated April 8, 1996 as Landlord, and Cleo, Inc., as Tenant. 10.34 Lease Agreement dated November 15, 1995 Exhibit 10.34 to Form 10-K by and between Registrant and CPA(R):3, dated April 8, 1996 as Landlord, and Cleo, Inc., as Tenant. 10.35 Lease Amendment Agreement dated November Exhibit 10.35 to Form 10-K 15, 1995 by and between Registrant and dated April 8, 1996 CPA(R):3, as Landlord, and Gibson Greetings, Inc., as Tenant. 28.1 Instruction Letters from Cigna Exhibit 28.1 to Form 8-K Corporation dated June 25, 1986 to dated July 14, 1986 Creditanstalt and Louisville Title Agency regarding repayment of loan. 28.2 Estoppel Certificate dated as of Exhibit 28.2 to Form 8-K June 30, 1986 from PFM to dated July 14, 1986 Creditanstalt. 28.3 Estoppel Certificate dated as of Exhibit 28.3 to Form 8-K June 30, 1986 from Walbridge to dated July 14, 1986 Creditanstalt. 28.4 Seller's/Lessee's Certificate dated Exhibit 28.4 to Form 8-K as of June 30, 1986 from PFM to dated July 14, 1986 Registrant and CPA(R):1. 28.5 Bill of Sale dated as of May 30, Exhibit 28.5 to Form 8-K 1986 from PFM to Registrant and dated July 14, 1986 CPA(R):1. 28.6 Deed dated as of May 30, 1986 from Exhibit 28.6 to Form 8-K PFM to Registrant and CPA(R):1. dated July 14, 1986 28.7 Press release regarding Letter of Exhibit 28.1 to Form 8-K Agreement. dated December 10, 1992 28.8 Prospectus of Registrant Filed as Exhibit 28.8 to dated January 18, 1980. Form 10-K/A dated September 24, 1993 28.9 Supplement dated May 7, 1980 Filed as Exhibit 28.9 to to Prospectus dated January 18, 1980. Form 10-K/A dated September 24, 1993 28.10 Press release dated June 30, 1993 Exhibit 28.1 to Form 8-K announcing the suspension of secondary dated July 12, 1993 market sales of Limited Partnership Units.
(b) Reports on Form 8-K The Registrant filed a report on form 8-K dated January 1, 1998 pursuant to Item 5 - Other Events (EX-99.1 Press Release From W. P. Carey & Co., Inc. (December 17, 1997)). - 17 - 19 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) and SUBSIDIARIES BY: CAREY DIVERSIFIED LLC 03/23/98 BY: /s/ John J. Park -------- ------------------------------------ Date John J. Park Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) 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: CAREY DIVERSIFIED LLC 03/23/98 BY: /s/ Francis J. Carey -------- ----------------------------------- Date Francis J. Carey Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) 03/23/98 BY: /s/ William P. Carey -------- ----------------------------------- Date William P. Carey Chairman of the Executive Committee and Director 03/23/98 BY: /s/ Steven M. Berzin -------- ----------------------------------- Date Steven M. Berzin Vice Chairman, Chief Legal Officer and Director 03/23/98 BY: /s/ Gordon F. DuGan -------- ----------------------------------- Date Gordon F. DuGan President, Chief Acquisitions Officer and Director 03/23/98 BY: /s/ Donald E. Nickelson -------- ----------------------------------- Date Donald E. Nickelson Chairman of the Audit Committee and Director 03/23/98 BY: /s/ Eberhard Faber IV -------- ----------------------------------- Date Eberhard Faber IV Director 03/23/98 BY: /s/ Barclay G. Jones, III -------- ----------------------------------- Date Barclay G. Jones, III Director 03/23/98 BY: /s/ Dr. Lawrence R. Klein -------- ----------------------------------- Date Dr. Lawrence R. Klein Director 03/23/98 BY: /s/ Charles C. Townsend, Jr. -------- ----------------------------------- Date Charles C. Townsend, Jr. Director 03/23/98 BY: /s/ Reginald Winssinger -------- ----------------------------------- Date Reginald Winssinger Director 03/23/98 BY: /s/ John J. Park -------- ----------------------------------- Date John J. Park Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) 03/23/98 BY: /s/ Claude Fernandez -------- ----------------------------------- Date Claude Fernandez Executive Vice President - Financial Operations (Principal Accounting Officer) - 18 - 20 APPENDIX A TO FORM 10-K CORPORATE PROPERTY ASSOCIATES 2 (A CALIFORNIA LIMITED PARTNERSHIP) AND SUBSIDIARIES 1997 ANNUAL REPORT 21 SELECTED FINANCIAL DATA (In thousands except per unit amounts)
1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- OPERATING DATA: Revenues $ 6,666 $ 5,161 $ 5,186 $ 4,591 $ 4,920 Income before extraordinary item (1) 10,711 1,732 2,596 2,625 3,000 Income before extraordinary item allocated: To General Partners 107 17 26 26 30 To Limited Partners 10,604 1,715 2,570 2,599 2,970 Per unit 192.80 31.18 46.75 47.33 54.10 Distributions attributable (2)(3): To General Partners 21 15 15 14 18 To Limited Partners 16,352 1,447 1,495 2,256 1,804 Per unit 297.31 26.31 27.19 41.11 32.86 Payment of mortgage principal (4) 1,675 1,617 1,490 937 896 BALANCE SHEET DATA: Total assets 41,736 40,571 33,123 33,683 33,852 Long-term obligations (5) 15,758 13,973 939 6,891 6,182
(1) Income in 1993 includes a $7,857,000 gain on sale of properties and an extraordinary loss on extinguishment of nonrecourse debt of the disposed properties of $521,000. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. The distribution attributable to the fourth quarter of 1997 was paid to Limited Partners in December 1997. (3) Distributions include special distributions of $260 and $15 per Limited Partnership Unit in 1993 and 1996, respectively. (4) Represents scheduled mortgage principal amortization paid. (5) Represents mortgage obligations due after more than one year. - 1 - 22 MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Net income for the year ended December 31, 1997, increased by $375,000 as compared with the prior year. The increase in net income was due to an increase in lease revenue (rental income and interest income from direct financing leases) and a decrease in interest expense offset by an increase in property expense. The increase in lease revenues was due to the commencement of a lease with Excel Communications, Inc. in December 1997 at the Partnership's property in Reno, Nevada, a full year's rental from Sports & Recreation, Inc. which commenced paying rent in July 1996 on its lease for the property in Moorestown, New Jersey and 100% occupancy of the Maumelle, Arkansas distribution facility in 1997. Until entering into the lease with Excel, the Reno property had been vacant since December 1994. The decrease in interest expense was due to the refinancing in June 1996 of the mortgage loan collateralized by property leased to Unisource Worldwide, Inc. at a lower rate of interest and the continuing amortization of the mortgage loan collateralized by the property leased to Pre Finish Metals, Incorporated. Property expenses increased due to the legal costs incurred in pursuing a bankruptcy claim against New Valley Corporation, the former lessee of the Reno and Moorestown properties and its termination of such leases in 1993 and 1994. This was partially offset by the net leasing of both the Reno and Moorestown property for the entire year. The lessees of the Moorestown and Reno properties are required to pay or reimburse the Partnership for costs of insurance, real estate taxes and maintenance. Such costs had previously been paid by the Partnership. Net income for the year ended December 31, 1996 increased by $29,000 as compared with net income for the prior year. The results for 1995 included $123,000 from nonrecurring other income items. The increase in income was due to the decrease in interest expense and was partially offset by decreases in lease revenues and interest income and by an increase in property expense. The decrease in interest expense was due to the payoff of the debt collateralized by the Gibson Greetings, Inc. properties in connection with the restructuring of the Gibson lease in the fourth quarter of 1995 and the benefit from the refinancing, in June 1996, of the mortgage loan on the Partnership's property leased to Unisource. Solely as a result of the Unisource mortgage refinancing, annual debt service decreased by $305,000. The decrease in lease revenues was due to the Gibson restructuring which included the severing of a property from the Gibson master lease, restating the Gibson lease and entering into a lease agreement for the severed property with Cleo, Inc. The Partnership received substantial consideration in 1995 for agreeing to the restructuring. Although the combined rent from the Cleo and Gibson properties decreased as compared with rents prior to the restructuring, net cash flow (rent less mortgage debt service) from the Gibson and Cleo properties has remained stable due to the retirement of the mortgage debt on such properties. The decrease in lease revenues was partially offset by new leases for the Moorestown, New Jersey property with Sports & Recreation, Inc. and a new lease with B&G Contract Packaging, Inc. for 50% of the leasable space at Maumelle. The increase in property expense was attributable to legal costs incurred in connection with the Partnership's bankruptcy claim against New Valley and the carrying costs for the Reno and Moorestown properties as well as paying a portion of the carrying costs for the Maumelle property prior to the lease with B&G. Interest expense is expected to continue to decrease as a result of the full amortization of Pre Finish Metals mortgage loan in 1998 at which time the Unisource loan will be the Partnership's only mortgage obligation. Lease revenues are expected to remain stable. Sports & Recreation has paid the rent on the Moorestown property since the inception of its lease term in July 1996 but has not occupied the property and does not intend to do so. The Sports & Recreation lease has an initial term through May 2012 and Sports & Recreation retains its obligation to pay rent until the end of such term regardless of whether it occupies the property. The Partnership is cooperating with Sports & Recreation in seeking a new lessee for the property even though it has no obligation to do so. -2- 23 Because of the long-term nature of the Partnership's net leases, inflation and changes in prices have not unfavorably affected the Partnership's net income or had an impact on the continuing operations of the Partnership's properties. All of the Partnership's net leases have either periodic mandated rent increases, sales overrides or periodic rent increases based on formulas indexed to increases in the Consumer Price Index, and may have caps on such CPI increases. Although increases in the CPI have been relatively moderate over the past several years, the Partnership should not be significantly impacted as several of its leases provide for stated rent increases rather than increases based on CPI formulas. Financial Condition The Partnership's cash balances decreased by $129,000 to $938,000. Cash flow from operations of $3,365,000 was sufficient to pay quarterly distributions of $1,416,000 and scheduled principal payment installments of $896,000. In addition, the Partnership paid a distribution of $752,000 in December 1997 in connection with the Consolidation with Carey Diversified LLC. In the first quarter of 1997, the Partnership used $426,000 to complete improvements to retrofit the Reno property and complete its obligation to fund certain improvements at the inception of the Excel lease. The Partnership and AT&T Corporation have been discussing funding an expansion of the Partnership's facility in exchange for a lease extension; however, AT&T and the Partnership have not entered into any commitment to complete a transaction. In the event that an agreement is reached, the Partnership's share of capital costs would be approximately $1,400,000. In addition, if the lease with Sports & Recreation is terminated, improvements would be necessary for the Moorestown property. The Partnership will seek to fund a significant portion of any necessary Moorestown improvements through a lease termination settlement with Sports & Recreation. The distribution paid in December 1997 was due to an exchange transaction which occurred on January 1, 1998. The majority of the Partnership's Limited Partners and its General Partners approved a consolidation by merger of the Partnership with a subsidiary limited partnership of Carey Diversified LLC, as proposed in the Consent Solicitation Statement/Prospectus of Carey Diversified dated October 16, 1997. In connection with the merger, 1,937 Limited Partnership Unitholders owning 54,227 Limited Partnership Units elected to exchange their limited partnership units for interests in Carey Diversified. The December 1997 distribution was intended to (a) distribute funds in order to adjust the net assets of the Partnership with the estimate of Total Exchange Value, as defined in the Consent Solicitation Statement/Prospectus, of those assets, and (b) pay the January distribution. Limited Partners owning 673 Limited Partnership Units who did not elect to receive interests in Carey Diversified have elected to retain a limited partnership interest in the Partnership as a Subsidiary Partnership Unitholder. Subsidiary Partnership Units have economic interests and legal rights in the Partnership that are substantially similar to those of Limited Partnership Units and represent a direct ownership interest in the Partnership. The holder of Subsidiary Partnership Units will be paid a pro rata share of any distribution paid by the Partnership to Carey Diversified. The Partnership will continue to pay distributions on a quarterly basis until liquidating distributions are made, as described in the Consent Solicitation Statement/Prospectus. The objective with respect to Subsidiary Partnership Units will be to pay distributions as if the Consolidation never had occurred based upon the net cash flows generated by the Partnership. The Partnership currently has two mortgage loans outstanding: the Unisource loan which will fully amortize in 2010 and the Pre Finish loan which will fully amortize in 1998. As a substantial number of the Partnership's properties are unleveraged, the Partnership has significant borrowing capacity that can be used, if necessary to fund any potential capital improvement commitments or build working capital reserves. Management has no current plans to draw on its borrowing capacity. Pre Finish has an option to purchase its leased property between June 1998 and 2003. The option is exercisable at the greater of fair market value of the property or $5,249,000 plus 2-1/2% per annum from December 1980 to the closing date. The mortgage loan on the Pre Finish property will fully amortize by June 30, 1998, therefore, the Partnership would not need to use any sales proceeds to pay off any mortgage debt in the event the option is exercised. Annual cash flow (rentals less debt service on the mortgage loan) from the Pre Finish property is currently $331,000. Pre Finish has not given any indication as to whether it intends to exercise its option. In addition, Cleo has an option to purchase its leased property at any time with at least six months' notice. The Partnership's share of the sales proceeds in the event the option is exercised would range between $4,275,000 and $4,631,000. Annual cash flow from the Cleo property is $355,000. The Cleo lease provides for an initial term through December 2005. -3- 24 In January 1998, the Partnership and Corporate Property Associate 3, an affiliate, which together own properties which were formerly leased to New Valley, were awarded $2,900,000 (of which the Partnership's share is $1,130,000) in their bankruptcy claim against New Valley. New Valley has filed an appeal to contest the award, and the Partnership and Corporate Property Associates 3 have cross-appealed on different issues and are seeking to preserve the award. Accordingly, there is no assurance that the Partnership will receive the full or any amount of this award. 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 that require tenants to indemnify the Partnership against all liabilities and losses related to their operations at the leased properties. If the Partnership undertakes to clean up or remediate any of its properties, the General Partner believes that in most cases the Partnership will be entitled to reimbursement from tenants for such costs. In the event that the Partnership absorbs a portion of the costs to comply with environmental statutes, the General Partner believes such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations. In 1994, the Partnership voluntarily conducted Phase II environmental reviews of certain of its properties based on the results of Phase I environmental reviews conducted in 1993. The Partnership believes, based on the results of such 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. In June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in full set general purpose financial statements. SFAS No. 130 is required to be adopted by 1998. The Partnership is currently evaluating the impact, if any, of SFAS No. 130. The Partnership's management company has responsibility for maintaining the Partnership's books and records and servicing the computer systems used in maintaining such books and records. In its preliminary assessment of Year 2000 issues, the management company believes that such issues will not have a material effect on the Partnership's operations; however such assessment has not been completed. The Partnership relies on its bank and transfer agent for certain computer-related services and has initiated discussions to determine whether they are addressing Year 2000 issues that might affect the Partnership. -4- 25 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, 1996 and 1997, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. We have also audited the financial statement schedule included on pages 18 to 20 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, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1997, 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 23, 1998 -5- 26 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1997
1996 1997 ---- ---- ASSETS: Real estate leased to others: Accounted for under the operating method: Land $ 4,850,433 $ 4,850,433 Buildings 12,756,321 13,186,939 ------------ ------------ 17,606,754 18,037,372 Accumulated depreciation 5,850,679 6,370,139 ------------ ------------ 11,756,075 11,667,233 Net investment in direct financing leases 20,259,530 20,474,498 ------------ ------------ Real estate leased to others 32,015,605 32,141,731 Cash and cash equivalents 1,066,861 937,680 Other assets, net of accumulated amortization of $3,571 in 1996 and $10,714 in 1997 and net of reserve for uncollected rents of $36,435 in 1997 600,057 772,519 ------------ ------------ Total assets $ 33,682,523 $ 33,851,930 ============ ============ LIABILITIES: Mortgage notes payable $ 7,787,061 $ 6,891,306 Accrued interest payable 75,233 67,967 Accounts payable and accrued expenses 66,050 213,494 Accounts payable to affiliates 63,447 1,169,349 Prepaid rental income 43,389 Security deposits 283,694 283,694 ------------ ------------ Total liabilities 8,275,485 8,669,199 ------------ ------------ Commitments and contingencies PARTNERS' CAPITAL: General Partners 208,334 (832,266) Limited Partners (54,900 Limited Partnership Units issued and outstanding) 25,198,704 26,014,997 ------------ ------------ Total partners' capital 25,407,038 25,182,731 ------------ ------------ Total liabilities and partners' capital $ 33,682,523 $ 33,851,930 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. -6- 27 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of INCOME For the years ended December 31, 1995, 1996 and 1997
1995 1996 1997 ---- ---- ---- Revenues: Rental income $1,717,457 $1,850,494 $2,134,323 Interest income from direct financing leases 3,174,996 2,688,154 2,723,690 Other interest income 170,631 46,177 61,690 Other income 122,720 6,138 ---------- ---------- ---------- 5,185,804 4,590,963 4,919,703 ---------- ---------- ---------- Expenses: Interest 1,351,797 731,843 542,304 Depreciation 519,891 499,320 519,460 General and administrative 298,974 274,126 305,184 Property expense 402,928 454,044 545,592 Amortization 16,133 6,848 7,143 ---------- ---------- ---------- 2,589,723 1,966,181 1,919,683 ---------- ---------- ---------- Net income $2,596,081 $2,624,782 $3,000,020 ========== ========== ========== Net income allocated to: Individual General Partner $ 2,596 $ 2,625 $ 3,000 ========== ========== ========== Corporate General Partner $ 23,365 $ 23,623 $ 27,000 ========== ========== ========== Limited Partners $2,570,120 $2,598,534 $2,970,020 ========== ========== ========== Net income per Unit: (54,975 weighted average Limited Partnership Units in 1995, 54,900 Limited Partnership Units in 1996 and 1997) $ 46.75 $ 47.33 $ 54.10 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -7- 28 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of PARTNERS' CAPITAL For the years ended December 31, 1995, 1996 and 1997
Partners' Capital Accounts ------------------------------------------------------------------ Limited Partners' General Limited Amount Per Total Partners Partners Unit (a) ----- -------- -------- --------- 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 Distributions (2,175,482) (21,755) (2,153,727) (39) Accrued preferred distribution (1,048,845) (1,048,845) Net income, 1997 3,000,020 30,000 2,970,020 54 ----------- ----------- ----------- ---- Balance, December 31, 1997 $25,182,731 $ (832,266) $26,014,997 $474 =========== =========== =========== ====
(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- 29 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 1995, 1996 and 1997
1995 1996 1997 ---- ---- ---- Cash flows from operating activities: Net income $ 2,596,081 $ 2,624,782 $ 3,000,020 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 536,024 506,168 526,603 Noncash rent adjustments (32,043) (199,403) (214,968) Restructuring fees received, net of costs 3,237,685 Provision for uncollected rents 22,666 36,435 Net change in operating assets and liabilities (196,404) (139,675) 16,992 ----------- ----------- ---------- Net cash provided by operating activities 6,164,009 2,791,872 3,365,082 ----------- ----------- ----------- Cash flows from investing activities: Additional capitalized costs (6,851) (200,808) (430,618) ----------- ----------- ----------- Net cash used in investing activities (6,851) (200,808) (430,618) ----------- ----------- ----------- Cash flows from financing activities: Distributions to partners (1,491,667) (2,303,728) (2,167,890) 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 (1,489,763) (936,587) (895,755) 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 (9,765,575) (2,101,709) (3,063,645) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (3,608,417) 489,355 (129,181) Cash and cash equivalents, beginning of year 4,185,923 577,506 1,066,861 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 577,506 $ 1,066,861 $ 937,680 =========== =========== =========== Supplemental disclosure of noncash financing activities: Accrued preferred distribution $ 1,048,845 ===========
The accompanying notes are an integral part of the consolidated financial statements. -9- 30 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"). All material inter-entity transactions have been eliminated. 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the assessment of recoverability of real estate assets. 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, rental revenue is recognized on a straight-line basis over the term of the leases 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 fair 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. Continued -10- 31 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 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, 1996 and 1997 were held in the custody of two financial institutions. Other Assets: Included in other assets are deferred charges which are costs incurred in connection with mortgage note refinancings and are amortized over the terms of the mortgages and deferred costs of Consolidation (see Note 13) which represent certain costs related to a Consolidation transaction which have been capitalized. Such Consolidation costs will be included in the revaluation of assets subsequent to December 31, 1997. 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. Reclassification: Certain 1995 and 1996 amounts have been reclassified to conform to the 1997 financial statement presentation. 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 Partnership will terminate on December 31, 2017, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement"). Through December 31, 1997, the Agreement provided that the General Partners were allocated 1% (1/10 of 1% to the Individual General Partner, and 9/10 of 1% to the Corporate General Partner, W.P. Carey & Co., Inc. ("W.P. Carey")), and the Limited Partners were allocated 99% of the profits and losses as well as distributions of Distributable Cash From Operations, as defined in the Agreement, and net proceeds from the sale of Partnership properties. Effective January 1, 1998, as a result the of merger (see Note 13) of the Partnership with a subsidiary partnership of Carey Diversified LLC ("Carey Diversified"), Carey Diversified is the sole general partner of the Partnership. Carey Diversified and the holders of Subsidiary Partnership Units are allocated 99% of the profits and losses and distributable cash and two special limited partners, Carey Management LLC ("Carey Management") and William P. Carey, are allocated 9/10 of 1% and 1/10 of 1% of the profits and losses and distributable cash, respectively. In connection with the merger with Carey Diversified and the listing on the New York Stock Exchange, the former Corporate General Partner satisfied the conditions for receiving a subordinated preferred return of $1,048,845, which was measured based upon the cumulative proceeds arising from the sale of the Partnership's assets. Such amount has been included in accounts payable to affiliates as of December 31, 1997. The preferred return, paid in January Continued -11- 32 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATION FINANCIAL STATEMENTS, Continued 1998, was subject to provisions that limited such payment until a specified cumulative return to limited partners was achieved. The Exchange Value of a Limited Partnership Unit to a Listed Share of Carey Diversified was included in calculating the cumulative return. 3. Transactions with Related Parties: Under the Agreement, a division of W.P. Carey was entitled to receive a property management fee and reimbursement of certain expenses incurred in connection with the Partnership's operations. 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. Effective January 1, 1998, the fees and reimbursements are payable to Carey Management, an affiliate of Carey Diversified. Property management fee and general and administrative expense reimbursements are summarized as follows:
1995 1996 1997 ---- ---- ---- Property management fee $254,174 $101,644 $150,696 General and administrative expense reimbursements 51,138 51,394 75,994 -------- -------- -------- $305,312 $153,038 $226,690 ======== ======== ========
During 1995, 1996 and 1997, fees aggregating $39,370, $192,086 and $110,832, respectively, were incurred for legal services performed by a firm in which the Secretary, until July 1997, 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. Expenses incurred in 1995, 1996 and 1997 were $51,472, $45,007 and $31,457, respectively. The Partnership's ownership interests in certain properties are jointly held with affiliated entities as tenants-in-common with the Partnership's undivided 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 $2,184,000 in 1998; $1,732,000 in 1999; $1,749,000 in 2000; $1,750,000 in 2001; and $1,774,000 in 2002 and aggregate approximately $14,395,000 through 2012. Contingent rents were approximately $65,000 and $45,000 in 1996 and 1997, respectively. No contingent rents were realized in 1995. Continued -12- 33 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, 1996 1997 ---- ---- Minimum lease payments receivable $34,832,818 $32,324,096 Unguaranteed residual value 22,700,673 22,700,673 ----------- ----------- 57,533,491 55,024,769 Less, Unearned income 37,273,961 34,550,271 ----------- ----------- $20,259,530 $20,474,498 =========== ===========
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to approximately $2,485,000 in 1998; $2,473,000 in 1999; $2,543,000 in 2000, $2,708,000 in 2001; and $2,229,000 in 2002 and aggregate approximately $32,324,000 through 2013. Contingent rents were approximately $149,000 in 1995. No contingent rents were realized in 1996 and 1997. 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, 1997 of approximately $18,478,000, before accumulated depreciation. As of December 31, 1997, mortgage notes payable bear interest at rates of 7.24% and 9.25% per annum. The mortgage notes mature in 1998 and 2010, respectively. Scheduled principal payments during each of the next five years following December 31, 1997 and thereafter are as follows: Year Ending December 31,
1998 $ 708,933 1999 370,390 2000 397,943 2001 427,546 2002 459,351 Thereafter 4,527,143 ---------- Total $6,891,306 ==========
Interest paid was $1,422,223, $769,023 and $549,570 in 1995, 1996 and 1997, respectively. Continued -13- 34 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 7. Distributions to Partners: Distributions are declared and paid to partners quarterly and are summarized as follows:
Distributions Paid Year Ending and Payable to Distributions Paid to Limited Partners' December 31, General Partners Limited Partners Per Unit Amount ------------ ---------------- ---------------- --------------- 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 ======= =========== ====== 1997 $21,755 $ 2,153,727 $39.23 ======= =========== ======
Distributions for 1997 include distributions of $751,581 to Limited Partners and $7,592 to General Partners declared in December 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:
1995 1996 1997 ---- ---- ---- Net income per Statements of Income $2,596,081 $2,624,782 $3,000,020 Excess tax depreciation (612,649) (368,687) (330,341) Restructuring fee 3,237,685 Other (106,511) (288,538) 14,246 ---------- ---------- ---------- Income reported for Federal income tax purposes $5,114,606 $1,967,557 $2,683,925 ========== ========== ==========
9. Industry Segment Information: The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate. In 1995, 1996 and 1997, the Partnership earned its total operating revenues (rental income plus interest income from direct financing leases) from the following lease obligors: Continued -14- 35 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
1995 % 1996 % 1997 % ---- - ---- - ---- - Unisource Worldwide, Inc. $1,316,677 27% $1,316,677 29% $1,322,410 27% Pre Finish Metals Incorporated 937,772 19 967,600 21 968,639 20 Gibson Greetings, Inc. 1,708,392 35 823,776 18 841,090 17 CSS Industries, Inc./Cleo, Inc. 46,763 1 444,576 10 457,891 9 AT&T Corporation 295,728 6 296,066 7 296,050 6 Western Union Financial Services, Inc. 237,162 5 236,784 5 235,975 5 B & G Contract Packaging, Inc. 126,000 3 235,500 5 Excel Communications, Inc. 2,247 208,965 4 Other 349,959 7 264,375 6 170,400 4 Sports & Recreation, Inc. 60,547 1 121,093 3 ---------- ---- ---------- --- ---------- --- $4,892,453 100% $4,538,648 100% $4,858,013 100% ========== ==== ========== ==== ========== ===
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 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. Western Union Financial Services, Inc. leases the Bridgeton property. 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 annual 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 termination offer. Sports & Recreation has paid all scheduled rents. The Partnership and CPA(R):3 will evaluate any other termination offers from Sports & Recreation. In August 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 Communications, Inc. The initial lease term commenced on December 26, 1996. In connection with the bankruptcy claim, the Bankruptcy Court entered a judgment in January 1998 which awarded the Partnership and CPA(R):3: $2,900,000 (of which the Partnership's share is $1,130,000) on their claim. New Valley has elected to appeal the Bankruptcy Court's judgment to the United States District Court for the District of New Jersey (Newark). The Partnership and CPA(R):3 have cross-appealed on different issues and are seeking to preserve the judgment. There is no assurance that the Partnership will receive the full amount or any of the judgment. Accordingly, no amount that the Partnership may ultimately receive has been recorded in the accompanying financial statements. Continued -15- 36 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 11. 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. In the event that the Partnership absorbs a portion of the costs to comply with environmental statutes, the General Partner believes 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. 12. 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, 1997 and 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. 13. Exchange of Limited Partnership Units: On October 16, 1997, Carey Diversified distributed a Consent Solicitation Statement/Prospectus to the Limited Partners that described a proposal to consolidate the Partnership with the other CPA(R) Partnerships. The General Partners' proposals that each of the nine CPA(R) limited partnerships be merged with a corresponding subsidiary partnership of Carey Diversified, of which Carey Diversified is the general partner, was approved by the Limited Partners of all nine of the CPA(R) limited partnerships. Each limited partner had the option of either exchanging his or her limited partnership interest for an interest in Carey Diversified ("Listed Shares") or to retain a limited partnership interest in the subsidiary partnership ("Subsidiary Partnership Units"). On January 1, 1998, 1,937 holders owning 54,227 of the 54,900 limited partnership units exchanged such units for 1,516,187 Listed Shares with 29 holders with the remaining 673 limited partnership units exchanging such units for Subsidiary Partnership Units. The General Partners received 158,192 Listed Shares for their interest in their share of the appreciation in Partnership properties. Continued -16- 37 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Listed shares commenced public trading on the New York Stock Exchange on January 21, 1998. Subsidiary Partnership Units provide substantially the same economic interest and legal rights as those of a limited partnership unit in the Partnership, are not listed on a securities exchange. A liquidating distribution to holders of Subsidiary Partnership units will be made after an appraisal of the Partnership's properties which appraisal date is to be no later than December 31, 1998. 14. Accounting Pronouncements: June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in full set general purpose financial statements. SFAS No. 130 and is required to be adopted by 1998. The Partnership is currently evaluating the impact, if any, of SFAS No. 130. -17- 38 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1997
Initial Cost to Cost Partnership Capitalized Decrease in ----------------------- Subsequent to Net Description Encumbrances Land Buildings Acquisition (a) Investment (b) ----------- ------------ ---- --------- --------------- -------------- Operating Method: Retail store in Greensboro, North Carolina $ 40,946 $ 186,926 $ 14,508 Retail store in New Orleans, Louisiana 129,065 188,599 15,776 Retail store leased to Kinko's of Ohio, Inc. 47,350 581,034 10,795 Warehouse and distribution center leased to, B&G Contract Packaging, Inc. 216,000 3,048,862 29,922 Land leased to Unisource Worldwide, Inc. $2,171,572 3,575,000 Building leased to Sports & Recreation, Inc. 265,757 1,925,029 $(1,030,786) Centralized telephone bureau leased to Excel Communi- cations, Inc. 446,956 1,325,456 624,189 (479,994) Warehouse and manufac- turing plant leased to Pre Finish Metals Incorporated 364,188 254,400 6,587,930 33,652 ---------- ---------- ----------- -------- ----------- $2,535,760 $4,975,474 $13,843,836 $728,842 $(1,510,780) ========== ========== =========== ======== ===========
Life on which Depreciation Gross Amount at which Carried in Latest at Close of Period (c)(d) Statement of --------------------------------- Accumulated Income Description Land Buildings Total Depreciation (d) Date Acquired is Computed ----------- ---- --------- ----- ---------------- ------------- ----------- Operating Method: Retail store in Greensboro, North Carolina $ 40,946 $ 201,434 $ 242,380 $ 144,402 September 2, 1980 15-35 YRS. Retail store in New Orleans, Louisiana 129,065 204,375 333,440 150,795 January 5, 1981 15-35 YRS. Retail store leased to Kinko's of Ohio, Inc. 47,350 591,829 639,179 432,315 October 1, 1980 15-35 YRS. Warehouse and distribution center leased to, B&G Contract Packaging, Inc. 216,000 3,078,784 3,294,784 1,710,911 April 9, 1981 30 YRS. Land leased to Unisource Worldwide, Inc. 3,575,000 3,575,000 April 29, 1980 Building leased to Sports & Recreation, Inc. 140,716 1,019,284 1,160,000 161,386 November 24, 1981 30 YRS. Centralized telephone bureau leased to Excel Communi- cations, Inc. 446,956 1,469,651 1,916,607 105,274 November 24, 1981 30 YRS. Warehouse and manufac- turing plant leased to Pre Finish Metals December 11, 1980 5-30 YRS. Incorporated 254,400 6,621,582 6,875,982 3,665,056 and June 30, 1986 ---------- ----------- ----------- ---------- $4,850,433 $13,186,939 $18,037,372 $6,370,139 ========== =========== =========== ==========
See accompanying notes to Schedule. -18- 39 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1997
Initial Cost to Cost Increase Partnership Capitalized (Decrease) in ------------------------ Subsequent to Net Description Encumbrances Land Buildings Acquisition (a) Investment (b) ----------- ------------ ---- --------- --------------- -------------- Direct Financing Method: Office, warehouse and distribution center leased to Unisource Worldwide, Inc. $4,355,546 $ 7,170,000 $ 9,528 $ 847,262 Centralized Telephone Bureau leased to Western Union Financial Services, Inc. $ 350,316 1,980,820 (36,494) Computer Center leased to AT&T Corporation 144,958 2,739,941 1,183 14,476 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 542,693 4,913,459 (1,548,904) Warehouse and manufacturing buildings leased to CSS Industries, Inc./Cleo, Inc. 323,122 4,315,774 (1,293,636) ---------- ---------- ----------- ------- ----------- $4,355,546 $1,361,089 $21,119,994 $10,711 $(2,017,296) ========== ========== =========== ======= ===========
Gross Amount at which Carried at Close of Period (c) ----------------------------- Description Total Date Acquired ----------- ----- ------------- Direct Financing Method: Office, warehouse and distribution center leased to Unisource Worldwide, Inc. $ 8,026,790 April 29, 1980 Centralized Telephone Bureau leased to Western Union November 24, Financial Services, Inc. 2,294,642 1981 Computer Center leased to November 24, AT&T Corporation 2,900,558 1981 Warehouse and manufacturing buildings leased to Gibson January 26, Greetings, Inc. 3,907,248 1982 Warehouse and manufacturing buildings leased to CSS Industries, January 26, Inc./Cleo, Inc. 3,345,260 1982 ----------- $20,474,498 ===========
See accompanying notes to Schedule. -19- 40 CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES TO SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION (a) Consists of acquisition costs, including legal fees, appraisal fees, title costs and other related professional fees and capitalized improvements. (b) The increase (decrease) in net investment is due to the amortization of unearned income producing a constant periodic rate of return on the net investment and does not include lease payments received which at times may be greater or less than such amortization under the direct financing method, the writedowns to fair value of the Partnership's properties in Moorestown, New Jersey and Reno Nevada and adjustments relating to deferred gains on lease restructurings. (c) At December 31, 1997, the aggregate cost of real estate owned for Federal income tax purposes is $42,039,945. (d) Reconciliation of Real Estate Accounted for Under the Operating Method
December 31, -------------------------- 1996 1997 ---- ---- Balance at beginning of year $17,405,946 $17,606,754 Additions 200,808 430,618 ----------- ----------- Balance at close of year $17,606,754 $18,037,372 =========== ===========
Reconciliation of Accumulated Depreciation
December 31, ------------------------- 1996 1997 ---- ---- Balance at beginning of year $5,351,359 $5,850,679 Depreciation expense 499,320 519,460 ---------- ---------- Balance at close of year $5,850,679 $6,370,139 ========== ==========
-20- 41 PROPERTIES
LEASE TYPE OF OWNERSHIP OBLIGOR TYPE OF PROPERTY LOCATION INTEREST ------- ---------------- -------- -------- GIBSON GREETINGS, Land and Manufac- Cincinnati, Ownership of a 28.5% INC. turing/Warehouse Ohio; and interest in land and Buildings - 2 locations Berea, Kentucky buildings CSS INDUSTRIES, Land and Manufac- Memphis, Ownership of a 28.5% INC./CLEO, INC. turing/Warehouse Tennessee interest in land and Buildings buildings UNISOURCE Land and Office/ City of Commerce, Ownership of land WORLDWIDE, Warehouse/Distri- California and building (1) INC. bution Center WESTERN UNION Land and Bridgeton, Ownership of an FINANCIAL SERVICES, Centralized Missouri approximate 39% INC. Telephone Bureau interest in land and buildings SPORTS & Land and Moorestown, Ownership of an RECREATION, INC. Building New Jersey approximate 39% interest in land and building AT&T CORPORATION Land and a Bridgeton, Ownership of an Computer Center Missouri approximate 39% interest in land and building EXCEL Land and Reno, Nevada Ownership of an COMMUNICATIONS, Building approximate 39% INC. interest in land and building PRE FINISH METALS Land and Warehouse/ Walbridge, Ohio Ownership of a 40% INCORPORATED Manufacturing Plant interest in land and building (1) B&G CONTRACT Land and Warehouse/ Maumelle, Ownership of land PACKAGING, INC. Distribution Center Arkansas and building WEXLER & WEXLER Land and Retail New Orleans, Ownership of land Store Louisiana and building A. JONES Land and Retail Greensboro, Ownership of land Store North Carolina and building KINKOS OF OHIO, INC. Land and Retail Store Canton, Ohio Ownership of land and LUTZ BAGELS, LLC and building
(1) These properties are encumbered by mortgage notes payable. -21- 42 MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS As of December 31, 1997, there were 1,966 holders of record of the Limited Partnership Units of the Partnership. On January 1, 1998, 1,937 holders of Limited Partnership Units exchanged such units for interests in Carey Diversified LLC and 29 holders exchanged such units for Subsidiary Partnership Units. There is no established public trading market for Subsidiary Partnership Units. In accordance with the requirements of the Partnership's Amended Agreement of Limited Partnership (the "Agreement") contained as Exhibit A to the Prospectus, the Corporate General Partner expects to continue to make quarterly distributions of Distributable Cash From Operations as defined in the Agreement. The following table shows the frequency and amount of distributions paid per Unit since 1994:
Cash Distributions Per Unit ------------------------------ 1995 1996 1997 ---- ---- ---- First quarter $ 6.60 $ 6.94 $ 6.37 Second quarter 6.66 22.03(a) 6.38 Third quarter 6.75 6.35 6.39 Fourth quarter 6.84 6.36 20.09(b) ------ ------ ------ $26.85 $41.68 $39.23 ====== ====== ======
(a) Includes a special distribution of $15 per Limited Partnership Unit. (b) Includes distributions of $6.40 and $13.69 per Limited Partnership Unit paid in October 1997 and December 1997, respectively. On October 16, 1997, the Partnership began the solicitation of consents from limited partners to approve the merger of the Partnership with all of the CPA(R) Partnerships into Carey Diversified LLC, a Delaware limited liability company. Limited Partners were offered the opportunity to vote to approve or disapprove the merger and to choose either interests ("Listed Shares") in the Carey Diversified LLC or interests ("Subsidiary Partnership Units") in the partnership which survived the merger. The solicitation period ended on December 16, 1997. The results of the voting were as follows:
Units Voted Units Voted Units Voted Units Not Yes No Abstaining Voted --- -- ---------- ----- Merger of Partnership with Carey Diversified 39,100 71.22% 764 1.40% 260 .47% 14,776 26.91%
Subsidiary Listed Shares Partnership Units ------------- ----------------- Number of Units Electing 54,227 673
-22- EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedle contains summary financial information extracted from Form 10-K for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 937,680 0 0 0 0 937,680 38,511,870 6,370,139 33,851,930 1,777,893 6,891,306 0 0 0 25,182,731 33,851,930 0 4,919,703 0 0 1,340,944 36,435 542,304 3,000,020 0 3,000,020 0 0 0 3,000,020 54.10 54.10
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