-----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, HAHgZSHh3zNVplUZftYKQQb9oO/x0u78Ss04ND6oLg8qBZjGc7KbmeVc5DvnMogs OKk+8ywnTH1SvUxZb/ezyg== 0000950130-96-001192.txt : 19960412 0000950130-96-001192.hdr.sgml : 19960412 ACCESSION NUMBER: 0000950130-96-001192 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960411 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-09727 FILM NUMBER: 96546022 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 620 FIFTHAVE CITY: NEW YORK STATE: NY ZIP: 10020 10-K405 1 FORM 10-K 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, 1995 ------------------------------------------------- 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 Identification No.) incorporation or organization) 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 492-1100 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE - ------------------------------- ------------------------------------ - ------------------------------- ------------------------------------ Securities registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP UNITS - -------------------------------------------------------------------------------- (Title of Class) - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark if disclosure of deliquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of Registrant: There is no active market for Limited Partnership Units. 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. The General Partners of Registrant are W. P. Carey & Co., Inc. (the "Corporate General Partner" or "W.P. Carey") and William Polk Carey (the "Individual General Partner"). The Corporate General Partner, the Individual General Partner and/or certain affiliates are also the General Partners 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"), Corporate Property Associates 9, L.P., a Delaware limited partnership ("CPA(R):9") and the advisor of Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional Properties Incorporated ("CIP(TM)") and Corporate Property Associates 12 Incorporated ("CPA(R):12"). Registrant has a management agreement with Carey Corporate Property Management Company ("Carey Management"), a division of W.P. Carey. According to the terms of this agreement, Carey Management performs a variety of management services for Registrant. Registrant has entered into agreements with Fifth Rock L.P., an affiliate, for the purpose of leasing office space. Reference is made to the Prospectus of Registrant dated January 18, 1980, as supplemented by a Supplement dated May 7, 1980, filed pursuant to Rules 424(b) and 424(C) under the Securities Act of 1933 and such Prospectus and such Supplement are incorporated herein by reference (said Prospectus, as so supplemented, is hereinafter called the "Prospectus"). 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 under the heading INVESTMENT OBJECTIVES AND POLICIES. The properties owned by Registrant are described in Properties 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, 1995, revenues from properties occupied by tenants which accounted for 10% or more of operating revenue were as follows: Gibson Greetings, Inc. ("Gibson"), 35%; Unisource Worldwide, Inc. ("Unisource"), 27% and Pre Finish, Metals, Inc, ("Pre Finish") 19%. No other property owned by Registrant accounted for 10% or more of its total operating revenues during 1994. See Note 9 to the Financial Statements in Item 8. Except for untenanted properties in Reno, Nevada and Greensboro, North Carolina 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 Partners 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 and liability coverage for the Reno and Greensboro properties as well as 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 - 1 - 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. ("Cleo") 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 Registrant's objective has been to invest in properties which are occupied by a single corporate tenant and subject to long-term net leases with such lease obligation 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 may 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's strategy in acquiring long-term real estate investments which are not greatly impacted by current competitive conditions has been effective for leases with AT&T Corporation, Gibson, Pre Finish, Unisource and Cleo and are not scheduled to expire until after the year 2000. In April 1995, Registrant entered into a lease with Sports & Recreation, Inc. ("Sports & Recreation") for Registrant's property in Moorestown, New Jersey which it owns as a tenant-in-common with CPA(R):3. Sports & Recreation is currently retrofitting the building for use as a retail store. At the earlier of May 1, 1996 or the end of the construction period, a 16 year lease term will commence. Registrant's share of annual rentals will be approximately $121,000 during the first five years with stated increases every five years thereafter. Registrant and CPA(R):3 have an obligation to reimburse Sports & Recreation for the costs of replacing the heating, ventilation and air conditioning systems and installing a new roof and drainage system. Registrant's share of such costs is estimated to be approximately $292,000. In November 1995, Registrant and CPA(R):3 which own three properties leased to Gibson agreed to restructure the Gibson lease and consented to severing one of the properties from the master lease and entered into a new lease for such property with Cleo. In connection with consenting to this restructuring, Registrant received a one-time lump sum payment of $3,477,000. As amended, Gibson's lease for the properties in Berea, Kentucky and Cincinnati, Ohio were extended through November 2013 from January 2002. Registrant's share of annual rents on the two remaining properties will be approximately $733,000, with 20% increase every five years. In addition, Gibson will have purchase options to purchase either or both of its leased properties in 2005 and 2010. The Cleo lease for the property formerly leased to Gibson in Memphis, Tennessee provides for a ten-year lease term with a rent increase in January 2001. Registrant's current share of annual rentals is $355,000. Although annual rentals from the three properties decreased as a result of the modification of the leases, cash flow will increase as a mortgage loan which was collateralized by the three properties was paid off at the time the modification agreement was executed. In February 1995, Maybelline Products Co. ("Maybelline") net leased 50% of the available space at the Registrant's distribution facility property in Maumelle for approximately two years with three two-year renewal options. Shortly thereafter, Registrant entered into a lease with A-Pak Packaging, Inc. ("A-Pak") for the remaining space. During the fourth fiscal quarter, A-Pak declared bankruptcy and is in the process of liquidating its assets. Registrant is currently negotiating a lease with a new lessee which will be retroactive to February 1996. Due to the short-term nature of the leases at this property, Registrant's rents are based on the competitive rates for this property. - 2 - 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. Registrant does not have any employees. The Corporate General Partner of Registrant together with its affiliates employ twelve individuals who perform accounting, secretarial and transfer services for Registrant. Gemisys, Inc. also performs certain transfer services for Registrant and The Bank of New York 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. - 3 - 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 CLEO, INC. Land and Manufac- Memphis, Ownership of a 28.5% turing/Warehouse Tennessee interest in land and Building buildings UNISOURCE Land and Office/ City of Commerce, Ownership of land WORLDWIDE, Warehouse/Distri- California and building (1) INC. bution Center NEW VALLEY Land and Bridgeton, Ownership of an CORPORATION Centralized Missouri approximate 39% 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 (2) Land and Reno, Ownership of an Building Nevada approximate 39% 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) MAYBELLINE Land and Warehouse/ Maumelle, Ownership of land PRODUCTS CO., INC. Distribution Center Arkansas and building WEXLER AND WEXLER Land and Retail New Orleans, Ownership of land Stores LA and building (2) Land and Retail Greensboro, North 0wnership of land Stores Carolina and building COLOR TILE, INC. Land and Retail Store Canton, Ohio Ownership of land and KINKOS (on adjacent sites) and building OF OHIO, INC.
(1) These properties are encumbered by mortgage notes payable. (2) These properties are currently vacant. - 4 - The material terms of Registrant's leases with its significant tenants are summarized in the following table:
Registrant's Share Current Lease Terms of Lease of Current Square Rent Per Expiration Renewal Ownership Purchase Gross Obligor Annual Rents Footage Sq.Ft.(1) (Mo./Year) Terms Interest Option Costs (2) - -------------- ------------ --------- ------------ ---------- ---------- --------------- ---------------- ------------ Gibson $ 733,429 1,194,840 2.59 04/2010 YES 28.5% interest Fair market $ 3,713,291 Greetings as tenant-in value as Inc. common; remain- encumbered by ing interest the lease. owned by Corp- orate Property Associates 3 ("CPA(R):3") Cleo, Inc. 345,600 1,006,566 1.49 12/2005 YES 28.5% interest The greater of 3,152,575 as tenant-in fair market common; remain- value or ing interest $4,275,000. Fair owned by market value is CPA(R):3 capped at $4,631,250. Unisource 1,292,800 411,579 3.14 04/2010 YES 100% The greater of 11,548,299 Worldwide, fair market Inc. value of the property or $10,744,680. New Valley 240,684 78,080 7.86 11/2001 YES 39% interest; N/A 2,314,551 Corporation as tenant-in- common, remaining interest owned by CPA(R):3 AT&T 292,588 55,810 13.37 11/2001 YES 39% interest; N/A 2,906,368 Corporation as tenant-in- common, remaining interest owned by CPA(R):3 Pre Finish 960,191 (3) 313,704 7.65 06/2003 YES 40% interest; The greater of 6,875,982 Metals as tenant-in- fair market Incorporated common, value of the remaining property or interest owned $5,248,817 plus by Corporate 2 1/2% thereof per Property annum, not Associates compounded, from 12/9/80 to the closing date. Sports & 121,000 (4) 74,066 4.17 05/2012 YES 39% interest; N/A 1,160,000 Recreation, remaining Inc. interest owed by CPA(R):3
(1) Represents rate for rent per square foot when combined with rents applicable to tenants-in-common. (2) Includes original cost of investment and net increases or decreases to net investment subsequent to purchase. (3) Partnership's share of equity rent of $27,617 (effective January 1996) plus variable debt rent. (4) Commencement of rent is the earlier of May 1, 1992 or completion of construction. -5- The material terms on the mortgage debt of Registrant's properties are summarized in the following table:
MORTGAGE Annual Interest Balance Annual Debt Maturity Estimated Payment Lease Obligor Rate 12/31/95 Service Date Due at Maturity Prepayment Provisions - -------------------------------------------------------------------------------------------------------------------------------- Unisource Worldwide, Inc. 10.00 $5,805,829 1,113,252 05/01/96 5,539,000 Pre Finish Metals Incorporated 9.25 (1) 1,456,891 628,787 (2) 07/01/98 (3) NO PREMIUM FOR PREPAYMENT IN FULL OR IN PART (MINIMUM OF $500,000).
(1) Variable rate indexed to lender's prime rate. (2) Estimate based on current interest rates. (3) Fully amortizing. Item 3. Legal Proceedings. ------------------ On April 1, 1993, New Valley Corporation, ("New Valley"), a tenant of a property owned by Registrant and formerly a tenant of two other of Registrant's properties, filed a petition of voluntary bankruptcy seeking reorganization under Chapter 11 of the United States Bankruptcy Code. In connection with the filings, Registrant and Corporate Property Associates 3, which together own the properties as tenants-in-common, filed a bankruptcy claim in the amount of $6,766,904. New Valley is contesting the claims and Registrant and New Valley are now in litigation regarding this claim. The matter is expected to go to trial in May of 1996. No prediction regarding the outcome of this litigation can be made at this time. Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- No matter was submitted during the fourth quarter of the year ended December 31, 1995 to a vote of security holders, through the solicitation of proxies or otherwise. 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 23 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. - 6 - 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 5 of Registrant's Annual Report contained in Appendix A. Item 8. Financial Statements and Supplementary Data. -------------------------------------------- The following financial statements and supplementary data are hereby incorporated by reference to pages 6 to 18 of Registrant's Annual Report -- contained in Appendix A. (i) Report of Independent Accountants. (ii) Balance Sheets as of December 31, 1994 and 1995. (iii) Statements of Income for the years ended December 31, 1993, 1994 and 1995. (iv) Statements of Partners' Capital for the years ended December 31, 1993, 1994 and 1995. (v) Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995. (vi) Notes to Financial Statements. Item 9. Disagreements on Accounting and Financial Disclosure. ----------------------------------------------------- NONE - 7 - PART III -------- Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- Registrant has no officers or directors. The directors and executive officers of the Corporate General Partner are as follows:
Has Served as a Director and/or Name Age Positions Held Officer Since (1) ---- --- -------------- ----------------- William Polk Carey 65 Chairman of the Board 8/79 Director Francis J. Carey 70 President 8/79 Director George E. Stoddard 79 Chairman of the Investment Committee 8/79 Director Raymond S. Clark 82 Chairman of the Executive Committee 8/79 Director Madelon DeVoe Talley 64 Vice Chairman of the Board 4/86 Director Barclay G. Jones III 35 Executive Vice President 8/82 Director Lawrence R. Klein 75 Chairman of the Economic Policy 4/84 Committee Director Claude Fernandez 43 Executive Vice President 3/83 Chief Administrative Officer Howard J. Altmann 32 Senior Vice President 8/90 H. Augustus Carey 38 Senior Vice President 8/88 John J. Park 31 Senior Vice President 7/91 Treasurer Michael D. Roberts 44 First Vice President 4/89 Controller
(1) Each officer and director of the Corporate General Partner will hold office until the next annual meeting of the Board of Directors and thereafter until his successor shall have been elected and shall have qualified or until his prior death, resignation or removal. William Polk Carey and Francis J. Carey are brothers and Raymond S. Clark is their brother-in-law. H. Augustus Carey is the nephew of William Polk Carey and Raymond S. Clark and the son of Francis J. Carey. A description of the business experience of each officer and director of the Corporate General Partner is set forth below: William Polk Carey, Chairman and Chief Executive Officer, 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 & Co., Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of Hubbard, - 8 - 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, 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 and its medical school, The James A. Baker III Institute for Public Policy at Rice 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. Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. 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 and has served as a member of the Board of Trustees of the Investment Program Association since 1990. From April 1987 until August 1992, he served as counsel to Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships and W.P. Carey and some of its affiliates. A real estate lawyer of more than 30 years' experience, he holds A.B. and J.D. degrees from the University of Pennsylvania. George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School. Raymond S. Clark is former President and Chief Executive Officer of the Canton Company of Baltimore and the Canton Railroad Company. A graduate of Harvard College and Yale Law School, he is presently a Director and Chairman of the Executive Committee of W.P. Carey and served as Chairman of the Board of W.P. Carey from its founding in 1973 until 1982. He is past Chairman of the Maryland Industrial Development Financing Authority. Madelon DeVoe Talley, Vice Chairman, is a member of the New York State Controller's Investment Committee, a Commissioner of the Port Authority of New York and New Jersey, former CIO of New York State Common Retirement Fund and New York State Teachers Retirement System. She also served as a managing director of Rothschild, Inc. and as the President of its asset management division. Besides her duties at W.P. Carey, Mrs. Talley is also a former Governor of the N.A.S.D. and is a director of Biocraft Laboratories, a New York Stock Exchange company. She is an alumna of Sarah Lawrence College and the graduate school of International Affairs at Columbia University. Barclay G. Jones III, Executive Vice President, Managing Director, and co-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. - 9 - Lawrence R. Klein, Chairman of the Economic Policy Committee since 1984, 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. Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, 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 his 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. Howard J. Altmann, Senior Vice President, Investment Department, joined W.P. Carey in August 1990. He was a securities analyst at Goldman Sachs & Co. for the retail industry from 1986 to 1988. Mr. Altmann received his undergraduate degree in economics and finance from McGill University and his M.B.A. from the Stanford University Graduate School of Business. H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988. 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. John J. Park, Senior Vice President 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. Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. from Brandeis University and an M.B.A. from Northeastern University. Item 11. Executive Compensation. ---------------------- Under the Amended Agreement of Limited Partnership of Registrant (the "Agreement"), 9/10th of 1% of Distributable Cash From Operations is payable to the Corporate General Partner and 1/10 of 1% of Distributable Cash From Operations, as defined, is payable to the Individual General Partner. The Corporate General Partner and the Individual General Partner received $13,425 and $1,492, respectively, from Registrant as their share of Distributable Cash From Operations during the year ended December 31, 1995. As owner of 200 Limited Partnership Units, the Corporate General Partner received cash distributions of $5,370 during the year ended December 31, 1995. 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 Corporate General Partner or any other affiliate of Registrant during the year ended December 31, 1995. Although Registrant is authorized to pay the Individual General Partner a fee of up to $15,000 in any year beginning after December 31, 1978, no fee will be paid so long as Mr. Carey is the Individual General Partner and no fee may be paid to any successor Individual General Partner appointed by Mr. Carey pursuant to the Agreement. In the future, the Corporate General Partner will continue to receive 9/10th of 1% of Distributable Cash From Operations, the Individual General Partner will continue to receive 1/10th of 1% of Distributable Cash From Operations and each General Partner will continue to be allocated the same percentage of the profits and losses of Registrant as had been allocated in the past. For a description of the subordinated interest of the Corporate General Partner and the Individual General Partner in Cash From Sales and Cash From Financings, reference is made to the materials contained in the Prospectus under the heading MANAGEMENT COMPENSATION. - 10 - Item 12. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- As of December 31, 1995, no person owned of record, or was known by Registrant to own beneficially more than 5% of the Limited Partnership Units of Registrant. The following table sets forth as of March 20, 1996 certain information as to the ownership by directors and executive officers of securities of Registrant:
Number of Units Name of and Nature of Percent Title of Class Beneficial Owner Beneficial Ownership (1) of Class - ------------------------ ---------------------- ------------------------ --------- Limited Partnership Units William Polk Carey (1) 210 units .38% Francis J. Carey George E. Stoddard Raymond S. Clark 26 .05 Madelon DeVoe Talley Barclay G. Jones III Lawrence R. Klein Claude Fernandez Howard J. Altmann H. Augustus Carey 20 .04 John J. Park Michael D. Roberts ___ ____ All executive officers and directors as a group (12 persons) 256 units .47% === ====
(1) As of March 20, 1996, the Corporate General Partner, W. P. Carey & Co., Inc., owned 200 Limited Partnership Units of Registrant. William Polk Carey, the sole shareholder of the Corporate General Partner, is the beneficial owner of these Units. 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, First 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. 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 - PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on ------------------------------------------------------ Form 8-K -------- (a) 1. Financial Statements: -------------------- The following financial statements are filed as a part of this Report: Report of Independent Accountants. Balance Sheets, December 31, 1994 and 1995. Statements of Income for the years ended December 31, 1993, 1994 and 1995. Statements of Partners' Capital for the years ended December 31, 1993, 1994 and 1995. Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995. Notes to Financial Statements. The financial statements are hereby incorporated by reference to pages 6 to 18 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, 1995. Notes to Schedule III. Schedule III and notes thereto are hereby incorporated by reference to pages 19 to 21 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 Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist. - 12 - (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. 4.1 $21,000 Promissory Note dated November 30, Exhibit 4.1 to Form 8-K 1982 of Registrant to Sunkist Service filed December 14, 1982 Company. 4.6 Assignment of Lease and Rents dated Exhibit 4.6 to Form 8-K November 30, 1982 from Registrant to dated December 14, 1982 Sunkist Service Company re: property leased to Heekin Can Company, Inc. in Springdale, Arkansas. 4.11 Assignment of Lease and Rents dated Exhibit 4.11 to Form 8-K November 30, 1982 from Registrant to dated December 14, 1982 Sunkist Service Company re: property leased to Pearle Vision Center, Inc. (a subsidiary of G.D. Searle & Co.) in Canton, Ohio. 4.13 Assignment of Lease and Rents dated Exhibit 4.13 to Form 8-K November 30, 1982 from Registrant to dated December 14, 1982 Sunkist Service Company re: property leased to Color Tile Supermarket, Inc. in Canton, Ohio. 4.16 Assignment to furnish instruments de- Exhibit 4.7 to Form 10-K fining the rights of holders of dated March 31, 1982 long-term debt of Registrant. 4.24 $14,200,000 Note dated April 25, 1986 from Exhibit 4.6 to Form 8-K Registrant to Bankers Life. dated May 15, 1986 4.25 Deed of Trust, Assignment of Rents, Fixture Exhibit 4.7 to Form 8-K Filing and Security Agreement dated April 25, dated May 15, 1986 1986 by Registrant, as Trustor, Lawyers Title Insurance Company, as Trustee, and Bankers Life, as Beneficiary, affecting property located in Commerce, CA. 4.27 Clarification Agreement and Amendment of Exhibit 4.9 to Form 8-K Mortgage Indenture and Deed of Trust of dated May 15, 1986 May 1, 1986.
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Exhibit Method of No. Description Filing - ------- ----------- --------- 4.29 Assignment of Leases and Rents dated as of Exhibit 4.11 to Form April 25, 1986 from Registrant to Bankers 8-K dated May 15, 1986 Life (Commerce, CA Property). 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. 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 4.44 Agreement of Sale dated July 11, 1986 Exhibit 4.1 to Form 8-K between Registrant and General Refractories dated July 29, 1986 Company. 10.1 Management Agreement between Registrant Exhibit 12(c) to and Carey Corporate Property Management, Registration Statement Inc. (Form S-11) No. 2-65357
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Exhibit Method of No. Description Filing - ---------- --------------------------------------------- -------------------------- 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 landlord, dated February 10, 1982 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 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
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Exhibit Method of No. Description Filing - ------- ----------- --------- 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 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
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Exhibit Method of No. Description Filing - ------- ----------- --------- 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 10.34 Lease Agreement dated November 15, 1995 Filed herewith. by and between Registrant and CPA(R):3, as Landlord, and Cleo, Inc., as Tenant.
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Exhibit Method of No. Description Filing - ------- ----------- --------- 10.35 Lease Amendment Agreement dated November 15, 1995 Filed herewith. by and between Registrant and 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 ------------------- No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1995. - 18 - SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) BY: W. P. CAREY & CO., INC. 04/08/96 BY: /s/ Claude Fernandez ----------- --------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (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: W. P. CAREY & CO., INC. William P. Carey Chairman of the Board and Director (Principal Executive Officer) Francis J. Carey President and Director George E. Stoddard BY: /s/ George E. Stoddard Chairman of the Investment ----------------------- Committee and Director George E. Stoddard Attorney in fact April 8, 1996 Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director Madelon DeVoe Talley Vice Chairman of the Board of Directors and Director 04/08/96 BY: /s/ Claude Fernandez - -------------- ----------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer) 04/08/96 BY: /s/ Michael D. Roberts -------------- ----------------------------- Date Michael D. Roberts First Vice President and Controller (Principal Accounting Officer) - 19 - APPENDIX A TO FORM 10-K CORPORATE PROPERTY ASSOCIATES 2 (A CALIFORNIA LIMITED PARTNERSHIP) 1995 ANNUAL REPORT SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
(In thousands except per unit amounts) 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- OPERATING DATA: Revenues $ 9,756 $ 9,764 $ 6,666 $ 5,161 $ 5,186 Income before 4,991 4,967 10,711 1,732 2,596 extraordinary item (1) Income before extraordinary item allocated: To General Partners 50 50 107 17 26 To Limited Partners 4,941 4,917 10,604 1,715 2,570 Per unit 89.83 89.40 192.80 31.18 46.75 Distributions attributable (2)(3): To General Partners 38 39 21 15 15 To Limited Partners 3,808 3,873 16,352 1,447 1,495 Per unit 69.24 70.42 297.31 26.31 27.19 Payment of mortgage principal (4) 1,818 1,985 1,675 1,617 1,490 BALANCE SHEET DATA: Total assets 63,934 63,247 41,736 40,571 33,123 Long-term obligations (5) 31,720 28,861 15,758 13,973 939
(1) 1993 net income includes a $7,857,000 gain on sale of properties, net of an extraordinary loss on extinguishment of nonrecourse debt of the disposed properties. (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. (3) 1993 distributions include a special distribution of $260 per Limited Partnership Unit ($14,300,000). (4) Represents scheduled mortgage principal amortization paid. (5) Represents mortgage obligations due after more than one year. - 1 - MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Results of Operations --------------------- Net income for the year ended December 31, 1995 increased by $864,000 as compared with net income for the prior year. Of such increase, $123,000 was due to nonrecurring items which are classified as other income in the accompanying Financial Statements. Excluding the effects of the nonrecurring items and the $446,000 writedown of a property to net realizable value in 1994, the Partnership would have reflected an increase in income of $295,000. The increase in income, as adjusted, was due to decreases in interest and property expenses and was partially offset by a modest decrease in lease revenues. The decrease in interest expense resulted from the prepayment of three mortgage loans on properties leased or formerly leased to New Valley Corporation ("New Valley") in the first quarter of 1995 and the prepayment of the mortgage loan on the Gibson Greetings, Inc. ("Gibson"), properties in November 1995 in connection with the restructuring of the Gibson lease. The decrease in property expenses was due to the costs incurred in 1994 in connection with the Partnership's assessment of its liquidity alternatives which included environmental reviews and property valuations. Lease revenues decreased by $59,000 as the result of the restructuring of the Gibson lease, as described below, and the termination of the New Valley lease in Reno, Nevada on December 31, 1994. The Gibson and New Valley decreases were partially offset by the leasing of the Maumelle, Arkansas distribution facility in 1995 to Maybelline Products Co. Inc. ("Maybelline") and A-Pak Packaging, Inc. ("A-Pak"). The substantial increase in cash flow provided from operations was primarily due to the receipt of a lump sum payment of $3,477,000 ($3,238,000, net of costs) in connection with the Gibson lease restructuring. As more fully described in Note 11 to the Financial Statements, the Partnership received the lump sum payment of $3,477,000 in connection with the modification of the Gibson lease. The Partnership severed one of three properties from the Gibson master lease, modified the master lease for the remaining two properties and entered into a new lease with a new lessee, Cleo, Inc. ("Cleo"), at the severed property. Annual gross revenue from the three properties subsequent to these modifications has been reduced. For financial reporting purposes, income from this transaction has been deferred and will be recognized over the remaining terms of the Gibson and Cleo leases. Net income for the year ended December 31, 1994 decreased as compared with the year ended December 31, 1993. The results of operations for the year are not directly comparable as the year ended December 31, 1993 includes the gain on the sale of the Heekin Can, Inc. ("Heekin") properties, the related extraordinary charge on the prepayment of the Heekin mortgage debt as well as $885,000 of operating income (rental income of $1,367,000 less interest expense of $435,000 and property management fees of $47,000) from the Heekin properties prior to the sale. Excluding the effect of income from the Heekin properties prior to the 1993 sale, income before gains on sale and extraordinary items would have increased by $396,000 in 1993 as compared with 1994. Accordingly, cash provided from operations decreased by $323,000 in 1994 as compared with 1993, after adjusting for the $885,000 provided to operations by the Heekin properties in 1993. Lease revenues for 1994 decreased by $1,582,000 as a result of the Heekin disposition and the decrease in rentals of $234,000 from the Maumelle, Arkansas property which was vacated by Family Dollar Stores Inc. in March 1994. The Partnership expects the trend of decreasing interest expense to continue due to the satisfaction of the mortgage loans on the New Valley and Gibson Properties in 1995 and the satisfaction of the mortgage loan on the Pre Finish Metals Incorporated ("Pre Finish") property which is scheduled to fully amortize in 1997. In addition, cash flow should benefit from scheduled rent increases over the next several years. Effective January 1996, the equity component of the Pre Finish rent has increased by $24,000 per annum. There are also scheduled increases in 1997 on the New Valley and AT&T Corporation leases. In May 1996, the Partnership is scheduled to start receiving rent of $121,000 per year from its lease with Sports & Recreation, Inc. ("Sports & Recreation") on the Moorestown, New Jersey property. Sports & Recreation is in the process of retrofitting the Moorestown property for use as a retail store. Annual rentals on the two Gibson properties and the Cleo property which had formerly been leased to Gibson are $733,000 and $355,000, respectively. Prior to the modification of the Gibson lease, the Partnership's annual rentals from the properties were $1,848,000. Although annual revenues from these properties will be reduced by $760,000, the - 2 - Partnership had been paying annual debt service of $1,166,000 on the Gibson mortgage loan which is no longer being paid. Therefore, annual cash flow from the Gibson and Cleo properties will reflect an increase of $406,000 in spite of the reduction in rental income. The Gibson mortgage loan had been scheduled to mature with a balloon payment of $5,872,000 in 1996 and the Partnership would have attempted to refinance the loan at that time. It is possible that the Partnership would have realized a reduction in debt service on any refinancing. In the fourth quarter of 1995, A-Pak filed a petition of bankruptcy and vacated its space at the Maumelle facility. The Partnership is in the process of negotiating a short-term lease (approximately two years) for the space at an amount similar to the rent paid by A-Pak. The Partnership's lease with Maybelline which provides annual rentals of $156,000 expires on December 31, 1996 and includes three two-year renewal terms at Maybelline's option. Although lease revenue may decrease as a result of the Gibson modification, cash flow from operating activities should remain stable or increase. Cash flow from operating activities would be reduced if Maybelline does not renew its lease. The Partnership is currently attempting to remarket the property in Reno. Annual carrying costs for the Reno property are currently $80,000 and annual carrying costs on the Greensboro property are estimated to be less than $10,000. The Partnership is currently negotiating to lease the Greensboro property which provided annual revenue of $21,000 under a prior lease which terminated in 1995. As a result of restructuring the Gibson lease, the Partnership's annual revenues from Gibson will decrease from 35% to approximately 17% of lease revenues providing greater diversification; however, the impact of the restructuring will increase lease rentals received from Unisource Worldwide, Inc. ("Unisource") to approximately 30%. As Gibson, Pre Finish and Unisource, will represent approximately 70% of lease revenues in 1996 and thereafter, the Partnership would be significantly affected if any of these lessees could not meet their lease obligations. There is no indication that any of these three lessees is currently experiencing financial difficulties. The Partnership may incur costs in the future in connection with a reassessment of liquidity alternatives. 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 ("CPI"), 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 ------------------- Except for the vacant properties in Reno, Nevada and Greensboro, North Carolina, all of the Partnership's properties are leased to corporate tenants under net leases which generally require the tenants to pay all operating expenses relating to the leased properties. The Partnership depends on a relatively stable operating cash flow from its net leases to meet operating expenses and fund quarterly distributions to partners. The capital structure of the Partnership changed significantly during the year as its mortgage debt decreased by approximately 54% due to the prepayment of four mortgage loans. Of the Partnership's two remaining mortgage loans, one has a balloon payment scheduled in 1996 with the other loan fully amortizing in 1998. Primarily as a result of the $8,495,000 pay down of mortgage debt, the Partnership's cash balances decreased by $3,608,000 to $578,000. Cash provided from operations increased by $3,393,000 to $6,164,000 with most of the increase related to the receipt of the lump sum payment from Gibson. The net proceeds from the Gibson transaction were used to satisfy a mortgage loan, and the remaining $2,926,000 of cash provided from operations along with $56,000 of cash reserves were used to pay quarterly distributions to partners and scheduled principal payments on mortgages. Cash reserves utilized in paying distributions include cash that was provided by operating activities in prior periods as well as cash provided by investing activities. As the cash flow from operating and investing activities may exceed earnings, distributions may also be in excess of net income per Limited Partnership Unit. During the five year period ended December 31, 1995, 1993 is the only year in which distributions exceeded net income. In 1993, limited partner distributions exceeded net income per Limited - 3 - Partnership Unit income by $125.02. This was primarily due to the special distribution of $260 per Unit from proceeds of the Heekin sale. The per Unit earnings from the gain on the sale of the Heekin properties, net of charges related to paying off the related mortgage debt, was $141.42. The Partnership's financing activities in 1995 consisted of the prepayment of four of the Partnership's mortgage loans, meeting scheduled principal payments on debt and payment of distributions to the partners of $1,492,000. In order to take advantage of the benefits created by the restructuring of the Gibson lease and the opportunity to retire above-market rate mortgage debt, the Partnership used substantially all of its cash reserves and proceeds from the Gibson lease restructuring payment to fund the retirement of various loans. In addition, the Partnership executed a loan, payable on demand, of $250,000 from the Corporate General Partner in order to support cash reserves. The loan was repaid in March 1996. As a result of the modification of the Gibson lease, and the retirement of high rate debt the Partnership expanded its unused borrowing capacity and expects that future cash flows from operations will increase. The Partnership may require additional loans from the Corporate General Partner to fund short term liquidity needs while it reviews existing loans and unleveraged properties for appropriate refinancing opportunities. The Partnership anticipates the payment of a special distribution to partners of $15 per Limited Partnership Unit, subject to certain conditions, in connection with the benefits realized from the Gibson lease restructuring. Future operating cash flows from operations are expected to remain stable or increase as a result of the loan prepayment and lease modification transactions accomplished in 1995. The Partnership's expected cash flows from operations are expected to be adequate to allow it to meet its operating cash needs and satisfy its recurring quarterly distribution objectives. In addition, the Partnership's unused borrowing capacity should be sufficient to satisfy repayment of maturing debt and other capital requirements, if necessary. The Partnership's investing activity for the periods presented in the financial statements consists primarily of proceeds from sales of real estate in 1993 and 1994. Pursuant to its lease with Sports & Recreation, the Partnership has an obligation to reimburse Sports & Recreation for certain retrofitting costs which are currently estimated to be $292,000. It is currently anticipated that such costs will be funded from operating cash flow; however, as described above, the Partnership may need to utilize certain of the additional amounts advanced by the Corporate General Partner. Beginning June 30, 1998, Pre Finish has an option to purchase its leased property upon six months notice with such option period ending in 2003. The option would be exercisable at the greater of fair marketable value or $5,249,000 plus 2 1/2% thereof compounded from December 1998 to the closing date. As the mortgage loan on the Pre Finish property will have amortized by the June 30, 1998, the Partnership would retain full proceeds of a sale. Annual cash flow (rentals less debt service on the mortgage loan) from the Pre Finish property is $331,000. In addition, Cleo has an option to purchase its property which is exercisable at any time with at least six months notice. In connection with the termination of the Moorestown and Reno leases, the Partnership expects to receive a bankruptcy settlement; however, the amount of such settlement cannot be estimated and no amounts that the Partnership may ultimately receive have been recorded in the accompanying financial statements. The Partnership's mortgage loan on the Unisource property is scheduled to mature in May 1996. The Partnership is in the process of seeking to refinance the loan for an amount necessary to satisfy the balloon payment. In the unlikely event that the Partnership is unable to refinance the Unisource loan, the Partnership lacks the funds to pay such loan off from its current cash reserves in which event it could attempt to obtain mortgage financing on unleveraged properties. As the Unisource mortgage loan is a nonrecourse obligation, the Partnership would be responsible for the balloon payment only to the extent of its interest in the encumbered property because the holder of such obligation has recourse only to the property collateralizing such debt. In the event that the balloon payment is not made, the Partnership could seek to restructure the debt with the existing lenders, or sell the property and use the sales proceeds to satisfy the mortgage debt. - 4 - All of the Partnership's properties are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. All but two 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. If the Partnership undertakes to clean up or remediate any of its properties, the General Partners believe 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 such costs because of a tenant's failure to fulfill its obligations (or because a property currently has no tenant), the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations. In 1994, 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. Effective January 1, 1995, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value. The adoption of SFAS 121 did not have a material effect on the Partnership's financial condition or results of operations. - 5 - REPORT of INDEPENDENT ACCOUNTANTS To the Partners of Corporate Property Associates 2: We have audited the accompanying balance sheets of Corporate Property Associates 2 (a California limited partnership) as of December 31, 1994 and 1995, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1995. We have also audited the financial statement schedule included on pages 19 to 21 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 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 financial position of Corporate Property Associates 2 (a California limited partnership) as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1995, 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 29, 1996 - 6 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) BALANCE SHEETS December 31, 1994 and 1995 1994 1995 ---- ---- ASSETS: Real estate leased to others: Accounted for under the operating method: Land $ 4,850,433 $ 4,850,433 Buildings 12,548,662 12,555,513 ----------- ----------- 17,399,095 17,405,946 Accumulated depreciation 4,831,468 5,351,359 ----------- ----------- 12,567,627 12,054,587 Net investment in direct financing leases 23,265,769 20,060,127 ----------- ----------- Real estate leased to others 35,833,396 32,114,714 Cash and cash equivalents 4,185,923 577,506 Accrued interest and rents receivable, net of reserve for uncollected rents of $22,660 in 1995 461,360 348,201 Other assets, net of accumulated amortization of $148,621 and $83,725 in 1994 and 1995 90,063 82,862 ----------- ----------- Total assets $40,570,742 $33,123,283 =========== =========== LIABILITIES: Mortgage notes payable $15,757,586 $ 7,262,720 Note payable to affiliate 250,000 Accrued interest payable 182,839 109,632 Accounts payable and accrued expenses 249,991 74,884 Accounts payable to affiliates 53,037 57,263 Prepaid rental income 33,877 Security deposits 282,800 282,800 ----------- ----------- Total liabilities 16,560,130 8,037,299 ----------- ----------- Commitments and contingencies PARTNERS' CAPITAL: General Partners 185,844 196,888 Limited Partners (55,000 and 54,900 Limited Partnership Units issued and outstanding at December 31, 1994 and 1995) 23,824,768 24,889,096 ----------- ----------- Total partners' capital 24,010,612 25,085,984 ----------- ----------- Total liabilities and partners' capital $40,570,742 $33,123,283 =========== =========== The accompanying notes are an integral part of the financial statements. - 7 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) STATEMENTS of INCOME For the years ended December 31, 1993, 1994 and 1995
1993 1994 1995 ---- ---- ---- Revenues: Rental income $ 1,729,958 $1,513,091 $1,717,457 Interest income from direct financing leases 4,803,389 3,437,921 3,174,996 Other interest income 132,380 186,038 170,631 Other income 24,397 122,720 ----------- ---------- ---------- 6,665,727 5,161,447 5,185,804 ----------- ---------- ---------- Expenses: Interest 2,142,199 1,593,880 1,351,797 Depreciation 501,762 501,657 519,891 General and administrative 290,658 276,283 298,974 Property expense 533,865 618,277 402,928 Amortization 22,046 17,195 16,133 Writedown to net realizable value 841,889 445,551 ----------- ---------- ---------- 4,332,419 3,452,843 2,589,723 ----------- ---------- ---------- Income before gains on sale of real estate and extraordinary charge 2,333,308 1,708,604 2,596,081 Gains on sale of real estate 8,377,679 23,451 ----------- ---------- ---------- Income before extraordinary charge 10,710,987 1,732,055 2,596,081 Extraordinary charge on extinguishment of debt 520,979 ----------- ---------- ---------- Net income $10,190,008 $1,732,055 $2,596,081 =========== ========== ========== Net income allocated to: Individual General Partner $ 10,190 $ 1,732 $ 2,596 =========== ========== ========== Corporate General Partner $ 91,710 $ 15,589 $ 23,365 =========== ========== ========== Limited Partners $10,088,108 $1,714,734 $2,570,120 =========== ========== ========== Net income per Unit: (55,000 Limited Partnership Units in 1993 and 1994 and 54,975 weighted average Units in 1995) Income before extraordinary item $192.80 $31.18 $46.75 Extraordinary item (9.38) ------- ------ ------ $183.42 $31.18 $46.75 ======= ====== ======
The accompanying notes are an integral part of THE FINANCIAL STATEMENTS. - 8 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) STATEMENTS of PARTNERS' CAPITAL For the years ended December 31, 1993, 1994 and 1995
Partners' Capital Accounts -------------------------------------------------- Limited Partners' General Limited Amount Per Total PARTNERS PARTNERS UNIT (a) ------ -------- -------- ---------- Balance, December 31, 1992 $ 30,538,862 $108,436 $ 30,430,426 $ 552 Distributions (16,991,423) (27,223) (16,964,200) (308) Net income, 1993 10,190,008 101,900 10,088,108 184 ------------ -------- ------------ ----- Balance, December 31, 1993 23,737,447 183,113 23,554,334 428 Distributions (1,458,890) (14,590) (1,444,300) (26) Net income, 1994 1,732,055 17,321 1,714,734 32 ------------ -------- ------------ ----- Balance, December 31, 1994 24,010,612 185,844 23,824,768 434 Repurchase of Limited Partner Units (29,042) (29,042) Distributions (1,491,667) (14,917) (1,476,750) (27) Net income, 1995 2,596,081 25,961 2,570,120 47 ------------ -------- ------------ ----- Balance, December 31, 1995 $ 25,085,984 $196,888 $ 24,889,096 $ 454 ============ ======== ============ =====
(a) Based on the weighted average Units issued and outstanding during all periods. The accompanying notes are an integral part of the financial statements. - 9 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) STATEMENTS of CASH FLOWS For the years ended December 31, 1993, 1994 and 1995
1993 1994 1995 ---- ---- ---- Cash flows from operating activities: Net income $ 10,190,008 $ 1,732,055 $ 2,596,081 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 523,808 518,852 536,024 Cash receipts on direct financing leases less than amortization of unearned income (13,969) (15,604) (32,043) Writedown to net realizable value 841,889 445,551 Restructuring fees received, net of costs 3,237,685 Gains on sale of real estate (8,377,679) (23,451) Extraordinary charge on extinguishment of debt 520,979 Net change in operating assets and liabilities 292,733 113,132 (173,738) ------------ ----------- ----------- Net cash provided by operating activities 3,977,769 2,770,535 6,164,009 ------------ ----------- ----------- Cash flows from investing activities: Proceeds from sale of real estate 28,377,679 124,615 Additional capitalized costs (6,851) ------------ ----------- ----------- Net cash provided by (used in) investing activities 28,377,679 124,615 (6,851) ------------ ----------- ----------- Cash flows from financing activities: Distributions to partners (16,991,423) (1,458,890) (1,491,667) Repurchase of Limited Partner Units (29,042) Proceeds from issuance of note payable to affiliate 250,000 Payments of mortgage principal (1,675,260) (1,617,464) (1,489,763) Prepayments of mortgage payable (11,927,709) (7,005,103) Prepayment premium on mortgage (477,108) ------------ ----------- ----------- Net cash used in financing activities (31,071,500) (3,076,354) (9,765,575) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,283,948 (181,204) (3,608,417) Cash and cash equivalents, beginning of year 3,083,179 4,367,127 4,185,923 ------------ ----------- ----------- Cash and cash equivalents, end of year $ 4,367,127 $ 4,185,923 $ 577,506 ============ =========== ===========
The accompanying notes are an integral part of the financial statements. - 10 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: ------------------------------------------- Use of Estimates: ----------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Leased to Others: - ----------------------------- Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Partnership diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States. The leases are accounted for under either the direct financing or operating methods. Such methods are described below: Direct financing method - Leases accounted for under the direct financing method - ----------------------- are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the lease. Operating method - Real estate is recorded at cost, revenue is recognized as - ---------------- rentals are earned and expenses (including depreciation) are charged to operations as incurred. Effective January 1, 1995, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value. The adoption of SFAS 121 did not have a material effect on the Partnership's financial condition or results of operations. 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 ("CPI") or sales overrides. Depreciation: - ------------ Depreciation is computed using the straight-line method over the estimated useful lives of components of the particular properties, which range from 5 to 35 years. Cash Equivalents: - ---------------- Corporate Property Associates 2 (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 Continued - 11 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued equivalents include commercial paper and money market funds. Substantially all of the Partnership's cash and cash equivalents at December 31, 1994 and 1995 were held in the custody of three and two financial institutions, respectively. Other Assets: - ------------- Included in other assets are deferred charges which are costs incurred in connection with mortgage note refinancing and are amortized on a straight- line basis over the terms of the mortgages. Income Taxes: - ------------- A partnership is not liable for income taxes as each partner recognizes his proportionate share of the partnership income or loss in his tax return. Accordingly, no provision for income taxes is recognized for financial statement purposes. 2. Partnership Agreement: ---------------------- The Partnership was organized on August 9, 1979 under the Uniform Limited Partnership Act of the State of California for the purpose of engaging in the business of investing in and leasing industrial and commercial real estate. The Corporate General Partner purchased 200 Limited Partnership Units in connection with the Partnership's public offering. The Partnership will terminate on December 31, 2017, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement"). The Agreement provides that the General Partners are allocated 1% (1/10 of 1% to the Individual General Partner, William P. Carey, and 9/10 of 1% to the Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey")) and the Limited Partners are allocated 99% of the profits and losses as well as distributions of distributable cash from operations, as defined. The partners are also entitled to receive net proceeds from the sale of the Partnership properties as defined in the Agreement. An affiliate of the General Partners may be entitled to incentive fees in connection with the liquidation of the Partnership. A division of W.P. Carey is engaged in the real estate brokerage business. The Partnership may sell properties through the division and pay subordinated real estate commissions as provided in the Agreement. The division could ultimately earn a real estate commission of up to $1,048,430 with respect to the sales of properties between 1986 and 1994 which amount will be retained by the Partnership unless the subordination provisions of the Agreement are satisfied. 3. Transactions with Related Parties: --------------------------------- Under the Agreement, a division of W.P. Carey, is entitled to receive a property management fee and reimbursement of certain expenses incurred in connection with the Partnership's operations. Property management fee in 1995 includes the effect of a transaction described in Note 11. General and administrative expense reimbursements consist primarily of the actual cost of personnel needed in providing administrative services, necessary to the operation of the Partnership. Property management fee and general and administrative expense reimbursements are summarized as follows: 1993 1994 1995 -------- -------- -------- Property management fee $128,243 $ 57,148 $254,174 General and administrative expense reimbursements 57,136 56,265 51,138 -------- -------- -------- $185,379 $113,413 $305,312 ======== ======== ======== Continued - 12 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued During 1993, 1994 and 1995, fees aggregating $79,380, 29,657 and $39,370, respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner. The Partnership is a participant in an agreement with W.P. Carey and other affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Partnership's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1993, 1994 and 1995 were $41,936, $46,172 and $51,472, respectively. On November 16, 1995, the Partnership borrowed $250,000 from W.P. Carey. The loan, which is evidenced by a promissory note and bears interest at the prime rate, requires the Partnership to pay the entire principal amount and accrued interest thereon on demand. The Partnership may prepay the note, in whole or in part, at any time without penalty. The interest incurred on the loan of $2,781 is included in interest expense for the year ended December 31, 1995. Such amount is also included in accounts payable to affiliates as of December 31, 1995. The Partnership repaid the loan in March 1996. The Partnership's ownership interests in certain properties are jointly held with affiliated entities as tenants-in-common with the Partnership's ownership interests ranging from 28.5% to 40%. The Partnership accounts for its assets and liabilities relating to tenants-in-common interests on a proportional basis. 4. Real Estate Leased to Others Accounted for Under the Operating Method: --------------------------------------------------------------------- The scheduled minimum future rentals, exclusive of renewals, under noncancellable operating leases amount to approximately $1,589,000 in 1996; $1,433,000 in each of the years 1997 to 1999; $1,442,000 in 2000 and aggregate approximately $14,146,000 through 2010. 5. Net Investment in Direct Financing Leases: ----------------------------------------- Net investment in direct financing leases is summarized as follows: December 31, ------------ 1994 1995 ---- ---- Minimum lease payments receivable $29,695,556 $37,321,569 Unguaranteed residual value 22,700,673 22,700,673 ----------- ----------- 52,396,229 60,022,242 Less, Unearned income 29,130,460 39,962,115 ----------- ----------- $23,265,769 $20,060,127 =========== =========== The scheduled minimum future rentals, exclusive of renewals, under noncancellable direct financing leases amount to approximately $2,485,000 in 1996; $2,509,000 in 1997; $2,485,000 in 1998, $2,473,000 in 1999, $2,543,000 in 2000 and aggregate approximately $37,322,000 through 2013. Contingent rentals were approximately $300,000, $176,000 and $149,000 in 1993, 1994 and 1995, respectively. Continued - 13 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 6. Mortgage Notes Payable: ---------------------- Mortgage notes payable, all of which are nonrecourse to the Partnership and the partners, are collateralized by the assignment of various leases and by real property with a carrying amount as of December 31, 1995 of approximately $18,424,000, before accumulated depreciation. As of December 31, 1995, mortgage notes payable bear interest at rates varying from 9.25% to 10% per annum and mature from 1996 to 1998. Scheduled principal payments during each of the next three years following December 31, 1995 are as follows: Year Ending December 31, ------------------------ 1996 $6,323,652 1997 574,889 1998 364,179 ---------- Total $7,262,720 ========== Interest paid was $2,270,264, $1,605,141 and $1,422,223 in 1993, 1994 and 1995, respectively. 7. Distributions to Partners: ------------------------- Distributions are declared and paid to partners quarterly and are summarized as follows:
Limited Year Ending Distributions Paid to Distributions Paid to Partners' Per December 31, General Partners Limited Partners Unit Amount - ------------- ---------------------- --------------------- ------------- 1993: Quarterly distributions $26,911 $ 2,664,200 $ 48.44 Special distribution - Note 12 312 14,300,000 260.00 ------- ----------- ------- Total 1993 $27,223 $16,964,200 $308.44 ======= =========== ======= 1994 $14,590 $ 1,444,300 $ 26.26 ======= =========== ======= 1995 $14,917 $ 1,476,750 $ 26.85 ======= =========== =======
Distributions of $3,856 to the General Partners and $381,700 to the Limited Partners for the quarter ended December 31, 1995 were declared and paid in January 1996. 8. Income for Federal Tax Purposes: ------------------------------- Income for financial statement purposes differs from income for Federal income tax purposes because of the difference in the treatment of certain items for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows: Continued - 14 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued
1993 1994 1995 ------------ ------------ ----------- Net income per Statements of Income $10,190,008 $1,732,055 $2,596,081 Excess tax depreciation (940,921) (630,883) (612,649) Difference in recognition of gain from sale of real estate 13,400,014 16,786 Writedown to net realizable value 841,889 445,551 Restructuring fee 3,237,685 Other 210,923 (155,149) (106,511) ----------- ---------- ---------- Income reported for Federal Income tax purposes $23,701,913 $1,408,360 $5,114,606 =========== ========== ==========
9. Industry Segment Information: ----------------------------- The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate. In 1993, 1994 and 1995, the Partnership earned its total operating revenues (rental income plus interest income from direct financing leases) from the following lease obligors:
1993 % 1994 % 1995 % ---------- ---- ---------- ---- ---------- ---- Gibson Greetings, Inc. $1,847,712 28% $1,847,712 37% $1,708,392 35% Unisource Worldwide, Inc. 1,312,053 20 1,314,240 27 1,316,677 27 Pre Finish Metals Incorporated 857,176 13 891,558 18 937,772 19 AT&T Corporation 295,155 5 295,429 6 295,728 6 New Valley Corporation 411,091 6 410,266 8 237,162 5 Other 131,055 2 113,807 2 206,959 4 Maybelline, Inc. 143,000 3 Cleo, Inc. 46,763 1 Family Dollar Stores, Inc. 312,000 5 78,000 2 Heekin Can, Inc. 1,367,105 21 ---------- --- ---------- --- ---------- --- $6,533,347 100% $4,951,012 100% $4,892,453 100% ========== === ========== === ========== ===
10. Properties Formerly Leased to New Valley Corporation: ----------------------------------------------------- The Partnership and Corporate Property Associates 3 ("CPA(R):3"), an affiliate, own 39% and 61% interests, respectively, in three properties located in Reno, Nevada; Bridgeton, Missouri and Moorestown, New Jersey. On April 1, 1993, the lessee, New Valley Corporation ("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 1993, the Partnership wrote down the Moorestown property to its estimated net realizable value of $1,160,000 and recognized a charge of $841,889 on the writedown. In December 1994, the Bankruptcy Court also approved the termination of New Valley's lease on the Reno property effective December 31, 1994. In connection with the lease termination, the Partnership wrote down the Reno property in 1994 to its estimated net realizable value of $1,295,000 and recognized a charge of $445,551 on the writedown. Continued - 15 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued On April 7, 1995, the Partnership and CPA(R):3, entered into a net lease for the Moorestown property with Sports & Recreation, Inc. ("Sports & Recreation") which is retrofitting the Moorestown property into a retail store. The lease provided for a feasibility period through September 30, 1995 which was extended through December 31, 1995 and is followed by an initial term of 16 years. Sports & Recreation will commence paying rent at the earlier of completion of construction or 120 days after the end of the feasibility period (May 1, 1996). Sports & Recreation will incur all retrofitting costs; however, the Partnership and CPA(R):3 will reimburse Sports & Recreation for the cost of replacing the HVAC system and installing a new roof and drainage system. The Partnership's share of the cost for replacing the HVAC system and installing a new roof and drainage system is estimated to be approximately $292,000. Annual rentals will initially be $308,750 (of which the Partnership's share is approximately $121,000) during the first five lease years with stated increases every five years thereafter. In connection with the termination of the Moorestown and Reno leases, the Partnership and CPA(R):3 expect to receive a bankruptcy settlement from New Valley. The amount of such settlement cannot be estimated and no amounts that the Partnership may ultimately receive have been recorded in the accompanying financial statements. The Partnership and CPA(R):3 are currently remarketing the Reno property. 11. Properties Leased to Gibson Greetings, Inc.: ------------------------------------------- On January 25, 1982, the Partnership and CPA(R):3 entered into a net lease with Gibson Greetings, Inc. ("Gibson"), for three properties in Memphis, Tennessee, Berea, Kentucky and Cincinnati, Ohio. In 1988, the Partnership and CPA(R):3 consented to Gibson's sublease of the Memphis, Tennessee property to a wholly- owned subsidiary, Cleo, Inc. ("Cleo"). The lease for the three properties had an initial term of 20 years with two five-year renewal options and provided for minimum annual rentals of $5,865,000 with rent increases every five years based on a formula indexed to the CPI. The lease also provided Gibson with a purchase option which was exercisable during the tenth year of the lease and at the end of the initial term. Gibson declined to exercise its purchase option during the tenth lease year in 1992. In connection with Gibson's sale of the Cleo subsidiary to CSS Industries, Inc. ("CSS"), the Partnership, CPA(R):3 and Gibson entered into a transaction on November 15, 1995, whereby the Memphis, Tennessee property occupied by Cleo was severed from the Gibson master lease, the Gibson lease was amended and Cleo entered into a separate lease for the Tennessee property with CSS as the guarantor of Cleo's lease obligations. The Partnership and CPA(R):3 received $12,200,000 (of which the Partnership's share was $3,477,000) as a one-time lump sum payment in consideration for severing the Tennessee property from the Gibson master lease. Gibson still retains certain specific obligations for any environmental violations which may be detected and which resulted from any pre-existing conditions and is ensuring that roof repairs or replacement are performed on the Tennessee property. Gibson and Cleo have until May 15, 1996 to complete the roof repair. The Gibson lease, as amended, on the two remaining properties in Kentucky and Ohio provides for an initial term which has been extended through November 30, 2013, and provides for one renewal term of ten years. Annual rent is $3,100,000 (of which the Partnership's share is approximately $733,000), with stated increases of 20% every five years through the end of the renewal term. The lease includes new purchase options exercisable on November 30, 2005 and 2010 and Gibson has the right to exercise the purchase option on one of its leased properties or Continued - 16 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued both. The option is exercisable at fair market value of the properties as encumbered by the lease. The Cleo lease provides for a ten-year term through December 31, 2005 with two five-year renewal terms. Annual rent is $1,500,000 (of which the Partnership's share is approximately $355,000), a rent increase effective January 1, 2001. The rent increase will be based on a formula indexed to the CPI; however, increased annual rent will be at least $1,689,000 but no more than $1,898,000. Cleo has an option to purchase the property at any time during the term of the lease so long as there is no event of monetary default. Exercise of the purchase option requires between six and twelve months notice. The exercise price is the greater of (i) $15,000,000 or (ii) fair market value capped at a maximum of $16,250,000. In connection with the payment made by Gibson to sever the Tennessee property from the Gibson lease, the Partnership has deferred recognition of a gain on restructuring of $3,237,685, consisting of its $3,477,000 share of the lump sum payment offset by costs of $239,315 including management fees of $173,000, payable to an affiliate and will amortize such deferral over the remaining initial terms of the Gibson and Cleo direct financing leases. The net proceeds from the agreement as well as other available funds were used to pay off the Partnership's share of the mortgage loan collateralized by the Gibson properties of $6,153,000 in November 1995. 12. Gains on Sale of Real Estate: ---------------------------- A. In January 1994, the Partnership sold its property in Hammond, Louisiana for $124,615 in cash, realizing a gain of $23,451 on the sale. The lease had been scheduled to expire in 1995. B. In April 1993, the Partnership sold properties in Hamilton, Ohio, Springdale, Arkansas and Augusta, Wisconsin to its lessee, Heekin Can Inc. ("Heekin") for $29,377,679 in cash with such amount determined pursuant to a formula in the lease. A gain of $8,377,679 was realized on the sale. In connection with the sale, the Partnership paid off the nonrecourse loan on the Heekin properties of $11,927,709. In paying off the mortgage loan the Partnership incurred a prepayment charge of $477,108 and a charge for the writeoff of unamortized financing costs of $43,871, resulting in an extraordinary charge on extinguishment of debt of $520,979. The Partnership used a portion of the net proceeds of the Heekin sale to pay a special distribution to limited partners of $14,300,000 ($260 per Limited Partnership Unit) and $312 to the individual general partner. 13. 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 but two of the Partnership's properties are currently leased to corporate tenants. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. The costs for remediation, which are being performed and paid for by the affected tenant at three of the properties, are not expected to be material. In the event that the Partnership absorbs a portion of such costs because of a tenant's failure to fulfill its obligations (or because a property currently has no tenant), the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations. Continued - 17 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 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. 14. 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 carrying amount of the Partnership's two mortgage notes payable approximates fair value of such mortgage notes at December 31, 1995. 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. - 18 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1995
Initial Cost to Cost Gross Amount at which Carried Partnership Capitalized Decrease in at Close of Period (c)(d) ------------------- Subsequent to Net -------------------------------- Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land Buildings Total - ----------- ------------ ---- --------- --------------- -------------- ---- --------- ----- Operating Method: Retail store in Greensboro, North Carolina $ 40,946 $ 186,926 $ 9,508 $ 40,946 $ 196,434 $ 237,380 Retail store in New Orleans, Louisiana 129,065 188,599 15,776 129,065 204,375 333,440 Retail stores leased to Kinko's of Ohio, Inc. and Color Tile, Inc. 47,350 581,034 10,795 47,350 591,829 639,179 Warehouse and distribution center leased to, Maybelline, Inc. 216,000 3,048,862 25,103 216,000 3,073,965 3,289,965 Land leased to Unisource Worldwide, Inc. $ 1,931,674 3,575,000 3,575,000 3,575,000 Centralized telephone bureaus formerly leased to New Valley Corporation 712,713 3,250,485 2,582 $(1,510,780) 587,672 1,867,328 2,455,000 Warehouse and Manufac- turing plant leased to Pre Finish Metals Incorporated 1,456,891 254,400 6,587,930 33,652 254,400 6,621,582 6,875,982 ---------- ---------- ----------- ------- ----------- ---------- ----------- ----------- $3,388,565 $4,975,474 $13,843,836 $97,416 $(1,510,780) $4,850,433 $12,555,513 $17,405,946 ========== ========== =========== ======= =========== ========== =========== =========== Life on which Depreciation in Latest Statement of Accumulated Income Description Depreciation (d) Date Acquired is Computed - ----------- ---------------- ------------- ------------- Operating Method: Retail store in Greensboro, North Carolina $ 133,291 September 2, 1990 15-35 yrs. Retail store in New Orleans, Louisiana 138,871 January 5, 1981 15-35 yrs. Retail stores leased to Kinko's of Ohio, Inc. and Color Tile, Inc. 399,341 October 1, 1980 15-35 yrs. Warehouse and distribution center leased to, Maybelline, Inc. 1,506,396 April 9, 1981 30 yrs. Land leased to Unisource Worldwide, Inc. April 29, 1980 Centralized telephone bureaus formerly leased to New Valley Corporation 121,702 November 24, 1981 30 yrs. Warehouse and Manufac- turing plant leased to Pre Finish Metals December 11, 1980 5-30 yrs. Incorporated 3,051,758 and June 30, 1986 ---------- $5,351,359 ==========
See accompanying notes to Schedule. - 19 -
CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1995 Cost Increase Initial Cost to Capitalized (Decrease) in Gross Amount at which Carried Partnership Subsequent to Net at Close of Period (c) -------------- ----------------------------- Description Encumbrances Land Buildings Acquisition(a) Investment(b) Land Buildings - ---------------------------------------------------------------------------------------------------------------------------------- Direct Financing Method: Office, warehouse and distribution center leased to Unisource Worldwide, Inc. $ 3,874,155 $ 7,170,000 $ 9,528 $ 793,771 Centralized Telephone Bureau leased to New Valley Corporation $ 350,316 1,980,820 (16,585) Computer Center leased to AT&T Corporation 144,958 2,739,941 1,183 20,286 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 542,693 4,913,459 (1,742,837) Warehouse and manufacturing buildings leased to Cleo, Inc. 323,122 4,315,774 (1,486,302) -------------------------------------------------------------------------------------- $ 3,874,155 $ 1,361,089 $ 21,119,994 $10,711 $ (2,431,667) ====================================================================================== Total Date Acquired ----- ------------- Direct Financing Method: Office, warehouse and distribution center leased to Unisource Worldwide, Inc. $ 7,973,299 April 29, 1980 Centralized Telephone Bureau leased to New Valley November 24, Corporation 2,314,551 1981 Computer Center leased to November 24, AT&T Corporation 2,906,368 1981 Warehouse and manufacturing buildings leased to Gibson January 26, Greetings, Inc. 3,713,315 1982 Warehouse and manufacturing buildings January 26, leased to Cleo, Inc. $ 3,152,594 1982 ----------- $20,060,127 ===========
See accompanying notes to Schedule. -20- CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) 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 which is greater (less) than lease payments received under the direct financing method, the writedowns to net realizable 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, 1995, the aggregate cost of real estate owned for Federal income tax purposes is $41,408,520. (d) Reconciliation of Real Estate Accounted --------------------------------------- for Under the Operating Method ------------------------------
December 31, -------------------- 1994 1995 ---- ---- Balance at beginning of period $16,322,133 $17,399,095 Activity during year: Sale of property (218,038) Additions 6,851 Reclassification from investment in direct financing leases 1,295,000 ----------- ----------- Balance at close of period $17,399,095 $17,405,946 =========== ===========
Reconciliation of Accumulated Depreciation ------------------------------------------
December 31, -------------------- 1994 1995 ---- ---- Balance at beginning of period $ 4,446,685 $ 4,831,468 Disposition during year (116,874) Depreciation expense for the period 501,657 519,891 ----------- ----------- Balance at close of period $ 4,831,468 $ 5,351,359 ----------- -----------
- 21 - 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 CLEO, INC. Land and Manufac- Memphis, Ownership of a 28.5% 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 NEW VALLEY Land and Bridgeton, Ownership of an CORPORATION Centralized Missouri approximate 39% 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 (2) Land and Reno, Nevada Ownership of an Building approximate 39% 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) MAYBELLINE Land and Warehouse/ Maumelle, Ownership of land PRODUCTS CO., INC. Distribution Center Arkansas and building WEXLER & WEXLER LAND AND RETAIL NEW ORLEANS, OWNERSHIP OF LAND STORE LOUISIANA AND BUILDING (2) LAND AND RETAIL GREENSBORO, OWNERSHIP OF LAND STORE NORTH CAROLINA AND BUILDING COLOR TILE, INC. AND LAND AND RETAIL STORE CANTON, OHIO OWNERSHIP OF LAND KINKOS OF OHIO, INC. (ON ADJACENT SITES) AND BUILDING
(1) These properties are encumbered by mortgage notes payable. (2) These properties are currently vacant. - 22 - MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS - -------------------------------------------------------------------------------- Except for limited or sporadic transactions, there is no established public trading market for the Limited Partnership Units of the Partnership. As of December 31, 1995, there were 1,987 holders of record of the Limited Partnership Units of the Partnership. 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 1992: Cash Distributions Per Unit ---------------------------- 1993 1994 1995 ---- ---- ---- First quarter $ 17.68 $ 6.55 6.60 Second quarter 277.73 (a) 6.56 6.66 Third quarter 6.51 6.57 6.75 Fourth quarter 6.52 6.58 6.84 ------- ------ ------ $308.44 $26.26 $26.85 ======= ====== ====== (a) includes a special distribution of $260 per Unit. REPORT ON FORM 10-K The Corporate General Partner will supply to any owner of Limited Partnership Units, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 1995 as filed with the Securities and Exchange Commission. - 23 - DIRECTORS AND SENIOR OFFICERS - -------------------------------------------------------------------------------- The Partnership has no directors or officers. The directors and senior officers of the Corporate General Partner are as follows: William Polk Carey Chairman of the Board Director Francis J. Carey President Director George E. Stoddard Chairman of the Investment Committee Director Raymond S. Clark Chairman of the Executive Committee Director Madelon DeVoe Talley Vice Chairman of the Board Director Barclay G. Jones III Executive Vice President Director Lawrence R. Klein Chairman of the Economic Policy Committee Director Claude Fernandez Executive Vice President Chief Administrative Officer Howard J. Altmann Senior Vice President H. Augustus Carey Senior Vice President John J. Park Senior Vice President Treasurer Debra E. Bigler First Vice President Ted G. Lagried First Vice President Anthony S. Mohl First Vice President Michael D. Roberts First Vice President Controller The directors and senior officers of W. P. Carey & Co., Inc. are substantially the same as above. A description of the business experience of each officer and director of the Corporate General Partner is set forth below: William Polk Carey, Chairman and Chief Executive Officer, 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 & Co., Inc. ("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, 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 and its medical school, The James A. Baker III Institute for Public Policy at Rice 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. - 24 - Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. 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 and has served as a member of the Board of Trustees of the Investment Program Association since 1990. From April 1987 until August 1992, he served as counsel to Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships and W.P. Carey and some of its affiliates. A real estate lawyer of more than 30 years' experience, he holds A.B. and J.D. degrees from the University of Pennsylvania. George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School. Raymond S. Clark is former President and Chief Executive Officer of the Canton Company of Baltimore and the Canton Railroad Company. A graduate of Harvard College and Yale Law School, he is presently a Director and Chairman of the Executive Committee of W.P. Carey and served as Chairman of the Board of W.P. Carey from its founding in 1973 until 1982. He is past Chairman of the Maryland Industrial Development Financing Authority. Madelon DeVoe Talley, Vice Chairman, is a member of the New York State Controller's Investment Committee, a Commissioner of the Port Authority of New York and New Jersey, former CIO of New York State Common Retirement Fund and New York State Teachers Retirement System. She also served as a managing director of Rothschild, Inc. and as the President of its asset management division. Besides her duties at W.P. Carey, Mrs. Talley is also a former Governor of the N.A.S.D. and is a director of Biocraft Laboratories, a New York Stock Exchange company. She is an alumna of Sarah Lawrence College and the graduate school of International Affairs at Columbia University. Barclay G. Jones III, Executive Vice President, Managing Director, and co-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, Chairman of the Economic Policy Committee since 1984, 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. Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, 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 his 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. Howard J. Altmann, Senior Vice President, Investment Department, joined W.P. Carey in August 1990. He was a securities analyst at Goldman Sachs & Co. for the retail industry from 1986 to 1988. Mr. Altmann received his undergraduate degree in economics and finance from McGill University and his M.B.A. from the Stanford University Graduate School of Business. - 25 - H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988. 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. John J. Park, Senior Vice President 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. Debra E. Bigler, First Vice President, joined W.P. Carey in 1989 as an assistant marketing director, rising to her present position where she bears responsibility for investor services throughout the southern United States. She was previously employed by E. F. Hutton & Company for nine years where she began as a Marketing Associate in Private Placement, Sales and Marketing and was then promoted to Regional Director. Ted G. Lagreid, First Vice President, joined W.P. Carey in 1994 and is regional director responsible for investor services in the western United States. Prior to joining the firm, he was a Vice President with Shurgard Capital Group, then for Sun America where he was an executive in its mutual funds group. He earned an A.B. from the University of Washington, received an M.P.A. from the University of Puget Sound and then spent eight years in the city of Seattle's Office of Management and Budget and Department of Community Development. Mr. Lagreid was a commissioner of the City of Oakland, California, serving on its Community and Economic Advisory Commission. Anthony S. Mohl, First Vice President, Director of Portfolio Management, joined W.P. Carey as Assistant to the President after receiving his M.B.A. from the Columbia University Graduate School of Business. Mr. Mohl was employed as an analyst in the strategic planning group at Kurt Salmon Associates after receiving an undergraduate degree from Wesleyan University. Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. from Brandeis University and an M.B.A. from Northeastern University. - 26 - EX-10.34 2 LEASE AGREEMENT DATED 11/15/95 EXHIBIT 10.34 LEASE AGREEMENT by and between CORPORATE PROPERTY ASSOCIATES 2 and CORPORATE PROPERTY ASSOCIATES 3 as LANDLORD and CLEO, INC. as TENANT Dated: November 15, 1995 - 1 - TABLE OF CONTENTS ----------------- Lease Agreement 1. Demise of Premises 2. Certain Definitions 3. Title and Conditions 4. Use of Leased Premises; Quiet Enjoyment 5. Term 6. Rent 7. Net Lease; Non-Terminability 8. Payment of Impositions; Compliance with Law; Environmental Matters 9. Liens; Recording and Title; Easements 10. Indemnification 11. Maintenance and Repair 12. Alterations 13. Condemnation 14. Insurance 15. Restoration; Reduction of Rent 16. Procedures Upon Purchase 17. Assignment and Subletting 18. Permitted Contests 19. Conditional Limitations; Default Provision 20. Additional Rights of Landlord 21. Notices 37 22. Estoppel Certificate 23. Surrender 24. Risk of Loss 25. No Merger of Title 26. Books and Records 27. Option to Purchase 28. Non-Recourse 29. Miscellaneous - 2 - List of Exhibits - ---------------- Exhibit A Description of Leased Premises Exhibit B List of Machinery and Equipment Exhibit C Intentionally Omitted Exhibit D Permitted Encumbrances Exhibit E Intentionally Omitted Exhibit F Rent Schedule - 3 - LEASE AGREEMENT, executed the 15th day of November, 1995, between CORPORATE PROPERTY ASSOCIATES 2 and CORPORATE PROPERTY ASSOCIATES 3 (collectively, "Landlord"), both California limited partnerships with an address c/o W. P. Carey & Co., Inc., 50 Rockefeller Plaza, New York, New York 10020 and CLEO, INC. ("Tenant"), a Tennessee corporation with an address at 4025 Viscount, Memphis, Tennessee 38118. - 4 - In consideration of the rents and provisions herein stipulated to be paid and performed, Landlord and Tenant hereby covenant and agree as follows: 1. Demise of Premises. Landlord hereby demises and lets to Tenant, ------------------ and Tenant hereby takes and leases from Landlord, for the term or terms and upon the provisions hereinafter specified, the following described property which shall include the portions of items (i), (ii) and (iii) of this Paragraph 1 located therein or appertaining thereto (collectively the "Leased Premises"): (i) the premises described in Exhibit "A" attached hereto and made a part hereof, together with the easements, rights and appurtenances thereunto belonging or appertaining (collectively, the "Land"); (ii) the buildings, structures and other improvements constructed and to be constructed on the Land (collectively, the "Improvements"); and (iii) that machinery and equipment installed in and upon the Improvements described in Exhibit "B" attached hereto, together with all additions and accessions thereto, substitutions therefor and replacements thereof permitted by this Lease (collectively, the "Equipment"). 2. Certain Definitions. -------------------- (a) "Additional Rent" shall mean Additional Rent as defined in Paragraph 6. (b) "Adjoining Property" shall mean all sidewalks, curbs, gores and vault spaces adjoining any of the Leased Premises. (c) "Alterations" shall mean all changes, additions, improvements or repairs to, all alterations, reconstructions, renewals or removals of and all substitutions or replacements for any of the Improvements or Equipment, both interior and exterior, structural and non-structural, and ordinary and extraordinary. (d) "Assignments" shall mean any assignment of rents and lessor's interest in leases from Landlord to First Lender and such other assignments as are executed by Landlord. (e) "Basic Rent" shall mean Basic Rent as defined in Paragraph 6. (f) "Basic Rent Payment Dates" shall mean the Basic Rent Payment Dates as defined in Paragraph 6. (g) "Beginning CPI" shall mean the Beginning CPI as defined in Exhibit F. (h) "Casualty Termination Date" shall mean the Casualty Termination Date as defined in Paragraph 14(b). (i) "Closing Date" shall mean the Closing Date as defined in Paragraph 16(b). (j) "Condemnation" shall mean a Taking and/or a Requisition. (k) "Condemnation Termination Date" shall mean the Condemnation Termination Date as defined in Paragraph 13(b). (l) "Default Rate" shall mean the Default Rate as defined in Paragraph 6. (m) "Ending CPI" shall mean the Ending CPI as defined in Exhibit F. (n) "Environmental Law" shall mean whenever enacted or promulgated, any applicable federal, state, foreign and local law, statute, ordinance, rule, regulation, or code relating to pollution or protection of the environment or to health and safety, including, without limitation, laws relating to (i) emissions, discharges, releases or threatened releases of Hazardous Substances into the environment (including ambient air, surface water, groundwater, or land) and (ii) the processing, use, generation, treatment, storage, disposal, recycling, or remediation of Hazardous Substances or Hazardous Conditions. - 5 - (o) "Environmental Violation" shall mean (a) any direct or indirect discharge, disposal, spillage, emission, escape, pumping, pouring, injection, leaching, release, seepage, filtration or transporting of any Hazardous Substance at, upon, under, onto or within the Leased Premises, or from the Leased Premises to the environment, in violation of any Environmental Law or in excess of any reportable quantity established under any Environmental Law or which could result in any liability to Landlord, Tenant or First Lender, any Federal, state or local government or any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (b) any deposit, storage, dumping, placement or use of any Hazardous Substance at, upon, under or within the Leased Premises or which extends to any Adjoining Property in violation of any Environmental Law or in excess of any reportable quantity established under any Environmental Law or which could result in any liability to any Federal, state or local government or to any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (C) the abandonment or discarding of any barrels, containers or other receptacles containing any Hazardous Substances in violation of any Environmental Laws, (d) any Hazardous Condition which results in any liability, cost or expense to Landlord or First Lender or any other owner or occupier of the Leased Premises, or which could result in a creation of a lien on the Leased Premises under any Environmental Law, or (e) any material violation of or noncompliance with any Environmental Law; provided, however, Environmental Violation shall not include any matter described in the foregoing clauses (a) through (e) of this definition that (i) arises out of or relates to a condition existing at the Leased Premises on the date of this Lease, (ii) arises or results from the migration of any Hazardous Substance onto the Leased Premises from any other property, or (iii) arises or accrues due to acts or omissions occurring prior to the date of this Lease. (p) "Event of Default" shall mean an Event of Default as defined in Paragraph 19(a). (q) "Final Payment" shall mean the final payment to Landlord of Net Proceeds or of a Net Award or of a Remaining Sum, as applicable, and "Final Payment Date" shall mean the first Basic Rent Payment Date occurring after said Final Payment. (r) "First Lender" shall mean the holder of a note or notes secured by a first priority mortgage encumbering the Leased Premises, or if there be more than one such holder, then the trustee for such holders or any other entity designated to act on their behalf; and "First Loan" shall mean the loan made by First Lender secured by the Mortgage, and evidenced by the First Note. Any other provision of this Lease to the contrary notwithstanding, so long as no First Lender exists to exercise such rights or give such consents, all rights and remedies granted to the First Lender under this Lease shall be deemed suspended and of no force and effect and neither Landlord nor Tenant shall have any obligation under this Lease to seek or obtain the prior consent, approval or waiver of the First Lender for any matter arising under or relating to this Lease unless a specific alternate procedure is set forth in any particular provision hereof in a case where there is no First Lender. (s) "First Note" shall mean a promissory note or notes from Landlord to First Lender, secured by the Mortgage and the Assignment to First Lender. (t) "Guarantor" shall mean CSS Industries, Inc., a Delaware corporation, the parent of Tenant, and its successors and assigns. (u) "Guaranty" shall mean the Guaranty and Suretyship Agreement in favor of Landlord, dated of even date herewith, executed by Guarantor, as the same may hereafter be amended. (v) "Hazardous Conditions" shall mean conditions of the environment, including soil, surface water, groundwater, subsurface strata or the ambient air, relating to or arising out of the use, handling, storage, treatment, recycling, generation, release, disposal, or threatened release of Hazardous Substances. (w) "Hazardous Substances" shall mean any pollutant, contaminant, hazardous or toxic substance, hazardous waste, or other chemicals, substances or materials subject to regulation under any Environmental Law. - 6 - (x) "Impositions" shall mean the Impositions as defined in Paragraph 8. (y) "Institutional Investor" shall mean an insurance company, savings bank, trust company or commercial bank (acting as trustee under any trust or under any public or private indenture or otherwise), savings and loan association, real estate investment trust, pension fund, company or foundation having gross assets of more than $25,000,000, any government or any agency of any government or entity owned in substantial part by any government or agency thereof. (z) "Law" shall mean any constitution, statute or rule of law. (aa) "Legal Requirements" shall mean all present and future Laws, codes, ordinances, orders, judgments, decrees, injunctions, rules, regulations and requirements, even if unforeseen or extraordinary, of every duly constituted governmental authority or agency and all covenants, restrictions and conditions now or hereafter of record which may be applicable to Tenant or to any of the Leased Premises, or to the use, manner of use, occupancy, possession, operation, maintenance, alteration, repair or reconstruction of any of the Leased Premises, even if compliance therewith necessitates structural changes or improvements or results in interference with the use or enjoyment of any of the Leased Premises. (bb) "Mortgage" shall mean any first priority mortgage or deed of trust encumbering the Leased Premises. (cc) "Net Award" shall mean the entire award payable to Landlord by reason of a Condemnation, less any expenses incurred by Landlord in collecting such award. (dd) "Net Proceeds" shall mean the entire proceeds of any insurance required under clauses (i), (ii), (iv) and (v) of Paragraph 14(a), less any expenses incurred by Landlord in collecting such proceeds. (ee) "Offer Amount" shall mean Offer Amount as defined in Paragraph 13(b) and 14(h). (ff) "Permitted Encumbrances" shall mean all covenants, restrictions, reservations, liens, conditions and easements of record, together with those encumbrances permitted pursuant to Paragraph 9(d). (gg) "Remaining Sum" shall mean the Remaining Sum as defined in Paragraph 15(a). (hh) "Rent Adjustment Date" shall mean January 1, 2002. (ii) "Replaced Equipment" shall mean the Replaced Equipment as defined in Paragraph 11. (jj) "Replacement Equipment" shall mean the Replacement Equipment as defined in Paragraph 11. (kk) "Requisition" shall mean any temporary requisition or confiscation of the use or occupancy of any of the Leased Premises by any governmental authority, civil or military, whether pursuant to an agreement with such governmental authority in settlement of or under threat of any such requisition or confiscation, or otherwise. (ll) "Retention Date" shall mean the date on which the amount of a Remaining Sum is finally determined. (mm) "Site Assessments" shall mean Site Assessments as defined in Paragraph 8(c). - 7 - (nn) "Site Reviewers" shall mean Site Reviewers as defined in Paragraph 8(c). (oo) "State" shall mean the State or Commonwealth in which the Leased Premises are situate. (pp) "Taking" shall mean any taking, other than a Requisition, by a duly constituted governmental authority or agency having jurisdiction of any of the Leased Premises in or by condemnation or other eminent domain proceedings pursuant to any Law, general or special, or by reason of any agreement with any condemnor in settlement of or under threat of any such condemnation or other eminent domain proceeding, or by any other means, or any de facto condemnation. (qq) "Term" shall mean the Term as defined in Paragraph 5. (rr) "Termination Value" shall mean $15,000,000. 3. Title; Condition; Subordination. -------------------------------- (a) The Leased Premises are demised and let subject to (i) the rights of any parties in possession of any of the Leased Premises, (ii) the existing state of title of the Leased Premises, including the Permitted Encumbrances, as of the commencement of the Term, (iii) any state of facts which an accurate survey or physical inspection of the Leased Premises might show, (iv) all Legal Requirements, including any existing violation of any thereof, and (v) the condition of the Leased Premises as of the commencement of the Term, without representation or warranty by Landlord; it being understood and agreed, however, that the recital of the Permitted Encumbrances herein shall not be construed as a revival of any thereof which for any reason may have expired. The provisions of this Paragraph 3(a) shall not be construed to preclude Tenant from enforcing any remedies it may have against Landlord by virtue of a determination that Landlord is in breach of or in default under a provision of this Lease, or against third parties other than Landlord or its successors by virtue of the existence of any Legal Requirement. (b) TENANT ACKNOWLEDGES THAT LANDLORD HAS NOT MADE AND WILL NOT MAKE ANY INSPECTION OF ANY OF THE LEASED PREMISES, AND LANDLORD LEASES AND WILL LEASE AND TENANT TAKES AND WILL TAKE THE LEASED PREMISES AS IS, AND TENANT ACKNOWLEDGES THAT LANDLORD (WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED PREMISES, INCLUDING ANY WARRANTY OR REPRESENTATION AS TO ITS FITNESS FOR USE OR PURPOSE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, AS TO LANDLORD'S TITLE THERETO, OR AS TO VALUE, COMPLIANCE WITH SPECIFICATIONS, LOCATION, USE, CONDITION, MERCHANTABILITY, QUALITY, DESCRIPTION, DURABILITY OR OPERATION, IT BEING AGREED THAT ALL RISKS INCIDENT THERETO ARE TO BE BORNE BY TENANT. TENANT ACKNOWLEDGES THAT THE LEASED PREMISES ARE OF ITS SELECTION AND TO ITS SPECIFICATIONS AND THAT THE LEASED PREMISES HAVE BEEN INSPECTED BY TENANT AND ARE SATISFACTORY TO IT. IN THE EVENT OF ANY DEFECT OR DEFICIENCY IN ANY OF THE LEASED PREMISES OF ANY NATURE, WHETHER PATENT OR LATENT, LANDLORD SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO OR FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING STRICT LIABILITY IN TORT). THE PROVISIONS OF THIS PARAGRAPH 3(b) HAVE BEEN NEGOTIATED; AND THE FOREGOING PROVISIONS ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY WARRANTIES BY LANDLORD, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED PREMISES, ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANY OTHER LAW NOW OR HEREAFTER IN EFFECT OR OTHERWISE. TENANT ALSO ACKNOWLEDGES THAT FOR PURPOSES OF THIS LEASE THE CONDITION OF THE LAND, THE IMPROVEMENTS AND THE EQUIPMENT COMPRISING THE LEASED PREMISES ARE DEEMED TO HAVE BEEN IN GOOD CONDITION AND REPAIR ON JANUARY 25, 1982. TENANT FURTHER ACKNOWLEDGES THAT LANDLORD HAS NO OBLIGATION TO MAINTAIN OR REPAIR - 8 - THE LEASED PREMISES AND THAT TENANT HAS THE SOLE OBLIGATION TO DO SO AS MORE PARTICULARLY SET FORTH HEREIN. (c) Tenant represents to Landlord that Tenant has found the state of title to the Leased Premises to be satisfactory for the purposes contemplated hereby, and acknowledges that title is in Landlord and that Tenant has only those rights with respect to the Leased Premises as provided in this Lease. Tenant further acknowledges and represents to Landlord that to the best of Tenant's knowledge, (i) the Improvements conform to all Legal Requirements and all requirements of the carriers of all insurance on any of the Leased Premises, (ii) all necessary easements have been obtained, (iii) all contractors and subcontractors have been fully paid and all material and supplies have been fully paid for, (iv) the Improvements have been fully completed in a workmanlike manner of first class quality, and (v) all Equipment has been installed and is fully operative. If any of the foregoing representations prove to be incorrect, Tenant acknowledges that it is Tenant's obligation and responsibility to remedy any problem resulting therefrom or relating thereto. (d) Landlord hereby assigns, without recourse or warranty whatsoever, to Tenant all warranties, guarantees and indemnities, express or implied, and similar rights which Landlord may have against any manufacturer, seller, engineer, contractor or builder in respect of any of the Leased Premises, including any rights and remedies existing under contract or pursuant to the Uniform Commercial Code. Such assignment shall remain in effect so long as no Event of Default exists hereunder or until the termination of this Lease. Landlord hereby agrees to execute and deliver at Tenant's expense such further documents, including powers of attorney, as Tenant may reasonably request (and which, in the good faith judgment of Landlord, do not adversely affect a substantial general interest of Landlord) in order that Tenant may have the full benefit of the assignment effected or intended to be effected by this Paragraph 3(d). (e) Landlord represents to Tenant that on the date of execution of this Lease there exists no Mortgage encumbering the Leased Premises. Notwithstanding the foregoing, this Lease automatically shall be subject and subordinate to the lien of any Mortgage hereafter placed upon the Leased Premises on condition that the holder of the Mortgage agrees in writing not to disturb Tenant in its rights, use and possession of the Leased Premises under this Lease or to terminate this Lease, except to the extent permitted to Landlord by the terms of this Lease, notwithstanding the foreclosure or the enforcement of the Mortgage. 4. Use of Leased Premises; Quiet Enjoyment. --------------------------------------- (a) Tenant may occupy and use the Leased Premises for any lawful purpose, provided that no Alterations may be made except in accordance with Paragraph 12, no Equipment may be removed from the Leased Premises except in accordance with Paragraphs 11(C), 13(d) and 14(h), and such use will not otherwise violate any provision of this Paragraph 4. Tenant shall not permit any unlawful occupation, business or trade to be conducted on any of the Leased Premises or any use to be made thereof contrary to any applicable Legal Requirement. Tenant shall not use or occupy or permit any of the Leased Premises to be used or occupied, nor do or permit anything to be done in or on any of the Leased Premises, in a manner which would or might (i) violate any certificate of occupancy affecting any of the Leased Premises, (ii) make void or voidable any insurance then in force with respect to any of the Leased Premises, (iii) make it difficult or impossible to obtain fire or other insurance which Tenant is required to furnish hereunder, (iv) cause structural injury to any of the Improvements, or (v) constitute a public or private nuisance or waste. (b) Subject to the provisions of Paragraphs 3 and 7(b), so long as no Event of Default exists hereunder, Landlord covenants that neither Landlord nor anyone rightfully claiming by, through or under Landlord, shall do any act to disturb the peaceful and quiet occupation and enjoyment of the Leased Premises, provided that Landlord may enter upon and examine any of the Leased Premises at reasonable times upon reasonable prior written notice to Tenant. 5. Term. ---- (a) Subject to the provisions hereof, Tenant shall have and hold the Leased Premises for an initial term (the "Term") commencing on the date hereof and ending on December 31, 2005. - 9 - If all Basic Rent for the entire Term, all Additional Rent and all other sums due hereunder shall not have been fully paid on the latter date, the Term shall automatically be extended until all said sums shall have been fully paid. Landlord shall have the right during the last twelve months of the Term to (i) advertise the availability of the Leased Premises for sale or for reletting and to erect upon the Leased Premises signs indicating such availability (provided that such signs do not unreasonably interfere with the use of the Leased Premises by Tenant), and (ii) show the Leased Premises to prospective purchasers or tenants at such reasonable times during normal business hours as Landlord may select. (b) Landlord hereby grants to Tenant the right at Tenant's option to extend the Term of this Lease for two (2) separate and additional periods of five (5) years each after the expiration of the initial term hereof (each additional five-year period is hereinafter referred to as a "renewal term"). Each such renewal term shall be subject to all the terms and conditions of this Lease as if the Term originally included such renewal term, except that Basic Rent during such renewal periods shall be calculated as set forth on Exhibit F, Section B. Upon the exercise of any such option, the Term shall include such renewal term therein. Tenant may exercise each of its options to extend the Term only by giving written notice of such extension to Landlord no earlier than twenty-four (24) months and no later than twelve (12) months prior to the expiration of the Term then in effect. Each renewal option may not be exercised if an Event of Default has occurred and is continuing on the date notice of the renewal is given to Landlord. In addition, the then current term may not be extended if, on the date the term is to be extended, an Event of Default has occurred and is continuing but Landlord may, in its sole discretion and without the consent of Tenant, waive such condition. 6. Rent. ---- (a) Tenant shall pay to Landlord, as rent for the Leased Premises during the Term, the amounts determined in accordance with the schedule contained in Exhibit "F" attached hereto ("Basic Rent"), in advance, commencing on the first day of the first month next following the date hereof and continuing on the first day of each month thereafter during the Term (the said days being called the "Basic Rent Payment Dates"), and shall pay the same at Landlord's address set forth above, or at such other place or to such other person as Landlord from time to time may designate to Tenant in writing, by check such that funds will be available in payment of said check on or before the date Basic Rent is due and in moneys which at the time of such payment shall be legal tender for the payment of public or private debts in the United States of America. Pro rata Basic Rent shall be due for the period from the date hereof through the last day of November, 1995 and shall be paid contemporaneously with the execution of this Lease by Tenant. (b) Tenant shall pay and discharge when the same shall become due, as additional rent, all other amounts and obligations whether payable to Landlord or others ("Additional Rent") which Tenant assumes or agrees to pay or discharge pursuant to this Lease (except that amounts payable as liquidated damages pursuant to Paragraph 19(b)(4) shall not constitute Additional Rent), together with every fine, penalty, interest and cost which may be added for non-payment or late payment thereof. In the event of any failure by Tenant to pay or discharge any of the foregoing, Landlord shall have all rights, powers and remedies provided herein, by law or otherwise, in the event of non-payment of Basic Rent. (c) If any installment of Basic Rent is not paid on the due date thereof, Tenant shall pay to Landlord immediately and without demand an amount equal to four percent of the amount of such installment. In addition, Tenant shall pay to Landlord on demand interest at the maximum legal rate permitted to be collected under applicable law from time to time (the "Default Rate") on all installments of Basic Rent more than one month past due, commencing on the Basic Rent Payment Date next succeeding the Basic Rent Payment Date on which said installment was originally due, and on all amounts of Additional Rent owed to Landlord from the due date thereof until paid in full and on all amounts of Additional Rent relating to obligations which Landlord shall have paid on behalf of Tenant, from the date of payment thereof, until paid in full. 7. Net Lease; Non-Terminability. ---------------------------- - 10 - (a) This is a net lease and Basic Rent, Additional Rent and all other sums payable hereunder by Tenant shall be paid without notice or demand, and without set-off, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense. (b) Except as otherwise expressly provided in this Lease, (aa) this Lease shall not terminate, (bb) Tenant shall not have any right to terminate this Lease during the Term, (cc) Tenant shall not be entitled to any set-off, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense of or to Basic Rent, Additional Rent or any other sums payable under this Lease, and (dd) the obligations of Tenant under this Lease shall not be affected by any interference with Tenant's use of any of the Leased Premises for any reason, including the following: (i) any damage to or destruction of any of the Leased Premises by any cause whatsoever, (ii) any Condemnation, (iii) the prohibition, limitation or restriction of Tenant's use of any of the Leased Premises, (iv) any eviction by paramount title or otherwise, (v) Tenant's acquisition of ownership of any of the Leased Premises other than pursuant to an express provision of this Lease, (vi) any default on the part of Landlord hereunder or under any other agreement, (vii) any latent or other defect in, or any theft or loss of, any of the Leased Premises, (viii) the breach of any warranty of any seller or manufacturer of any of the Equipment, (ix) any violation of Paragraph 4(b) by Landlord, or (x) any other cause, whether similar or dissimilar to the foregoing, any present or future Law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent covenants and agreements, that Basic Rent, Additional Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events (or, in lieu thereof, Tenant shall pay amounts equal thereto), and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to an express provision of this Lease. (c) Tenant agrees that it shall remain obligated under this Lease in accordance with its provisions and that, except as otherwise expressly provided herein, it shall not take any action to terminate, rescind or avoid this Lease, notwithstanding (i) the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding-up or other proceeding affecting Landlord, (ii) the exercise of any remedy, including foreclosure, under the Mortgage, or (iii) any action with respect to this Lease (including the disaffirmance hereof) which may be taken by any trustee, receiver or liquidator of Landlord or by any court. (d) Except as expressly provided for in this Lease, Tenant waives all rights which may now or hereafter be conferred by law (i) to quit, terminate or surrender this Lease or any of the Leased Premises, or (ii) to any set-off, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense of or to Basic Rent, Additional Rent or any other sums payable under this Lease. (e) Nothing in this Paragraph 7 shall be construed to preclude Tenant from enforcing such remedies as it may have against Landlord or third parties arising by virtue of a determination that Landlord is in breach of or default under a provision of this Lease, other than those remedies specifically waived. 8. Payment of Impositions; Compliance with Law; Environmental Matters. ------------------------------------------------------------------ (a) Subject to the provisions of Paragraph 18 relating to contests, Tenant shall, before interest or penalties are due thereon, pay and discharge all taxes of every kind and nature (including real and personal property, sales, use, income, franchise, withholding, profits and gross receipts taxes), all charges for any easement or agreement maintained for the benefit of any of the Leased Premises, all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents and charges, all ground rents, and all other public charges whether of a like or different nature, even if unforeseen or extraordinary, imposed upon, or in respect of or be measured by or become a lien upon, or assessed against (i) Landlord or Tenant as a result of the acquisition, use, or leasing of the Leased Premises or any portion thereof, (ii) any of the Leased Premises or (iii) arising in respect of the occupancy, use or possession thereof or any activity conducted on the Leased Premises or any part thereof, or the Basic Rent or Additional Rent (including, without limitation, any gross income tax or excise tax levied by any governmental body on or with respect to the receipt of such Basic Rent or Additional Rent [computed as if - 11 - such Basic Rent or Additional Rent or Landlord's income from the Leased Premises were the only income of Landlord (collectively, the "Impositions"). Nothing herein shall obligate Tenant to pay (i) franchise, capital stock or similar taxes, if any, of Landlord, and assessments, levies and liens arising therefrom, (ii) transfer, income, profits or revenue taxes and assessments, levies and liens arising therefrom, other than any gross receipts or gross income taxes imposed or levied upon or measured by Basic Rent, Additional Rent or other sums payable by Tenant pursuant to this Lease, or (iii) any estate, inheritance, succession, gift, capital levy or similar tax, unless the taxes referred to in clauses (i) and (ii) above are in lieu of or a substitute for any other tax or assessment upon or with respect to any of the Leased Premises which, if such other tax or assessment were in effect, would be payable by Tenant. In the event that any assessment against any of the Leased Premises may be paid in installments, Tenant shall have the option to pay such assessment in installments; and in such event, Tenant shall be liable only for those installments which become due and payable during the Term. Tenant shall prepare and file all tax reports required by governmental authorities which relate to the Impositions. If any such reports require information from Landlord not available to or known by Tenant, or signatures of Landlord, Tenant shall request same from Landlord and upon obtaining such information from Landlord, shall prepare and file such tax reports. Tenant shall deliver to Landlord, with the affidavit of the chief financial officer of Tenant required under Paragraph 26, copies of real estate tax notices, bills and/or assessments relating to the Leased Premises and evidence of payment of same. (b) Tenant shall promptly comply with and conform to all of the Legal Requirements (including all Environmental Laws but not including any matter expressly excluded from the definition of Environmental Violation), subject to the provisions of Paragraph 18 hereof. (c) Upon prior reasonable written notice from Landlord, Tenant shall permit such persons as Landlord may designate ("Site Reviewers") to visit the Leased Premises during normal business hours and perform, as agents of Landlord, in a manner that does not unduly interfere with Tenant's business operations, environmental site investigations and assessments ("Site Assessments") on the Leased Premises for the purpose of determining whether there exists on the Leased Premises any Environmental Violation or any condition which could result in any Environmental Violation. Such Site Assessments may include both above and below the ground testing for Environmental Violations and such other tests as may be necessary, in the opinion of the Site Reviewers, to conduct the Site Assessments. Tenant shall supply to the Site Reviewers such historical and operational information regarding the Leased Premises in the possession or control of Tenant as may be reasonably requested by the Site Reviewers to facilitate the Site Assessments, and shall make available for meetings with the Site Reviewers appropriate personnel having knowledge of such matters. The cost of performing and reporting Site Assessments shall be paid by Landlord, except if performed pursuant to Paragraph 8(d) hereof. (d) If Tenant fails to correct any Environmental Violation which occurs or is found to exist, Landlord shall have the right (but no obligation) at Tenant's sole cost and expense to take any and all actions as Landlord shall deem necessary or advisable in order to cure such Environmental Violation including, without limitation, the right to perform Site Assessments. (e) Tenant shall notify Landlord as expeditiously as possible after becoming aware of any Environmental Violation (or alleged Environmental Violation) or noncompliance with any of the covenants contained in this Paragraph 8 and shall forward to Landlord immediately upon receipt thereof copies of all orders, reports, notices, permits, applications or other communications relating to any such violation or noncompliance. (f) All future leases, subleases or concession agreements relating to the Leased Premises entered into by Tenant shall contain covenants of the other party to not at any time (i) cause any Environmental Violation to occur or (ii) permit any Person occupying the Leased Premises through said subtenant or concessionaire to cause any Environmental Violation to occur. 9. Liens; Recording and Title; Easements. ------------------------------------- (a) Tenant shall not, directly or indirectly, create or permit to be created or to remain, and shall promptly discharge, any lien on any of the Leased Premises or Basic Rent, Additional - 12 - Rent or any other sums payable by Tenant under this Lease, other than (i) the Mortgage, (ii) this Lease and any subleases hereunder, (iii) the Assignment, (iv) the Permitted Encumbrances, (v) any mortgage, lien, encumbrance or other charge created by or resulting from any act or omission of Landlord and (vi) liens for Impositions not yet payable or being contested as permitted pursuant to Paragraph 8. The existence of any mechanics', laborers', materialmen's, suppliers' or vendors' liens or any right in respect thereof shall not constitute a violation of' this Paragraph 9 if discharged within sixty (60) days of completion of the labor or services or delivery of the materials which gave rise to imposition of said liens. NOTICE IS HEREBY GIVEN THAT LANDLORD SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT, OR TO ANYONE HOLDING ANY OF THE LEASED PREMISES THROUGH OR UNDER TENANT, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LANDLORD IN AND TO ANY OF THE LEASED PREMISES. (b) Tenant shall execute, deliver and record, file or register from time to time all such instruments as may be required by any present or future Law in order to evidence the respective interests of Landlord and Tenant in any of the Leased Premises, and shall cause this Lease, or a memorandum of this Lease, and any supplement hereto or to such other instrument, if any, as may be appropriate, to be recorded, filed or registered and re-recorded, refiled or re- registered in such manner and in such places as may be required by any present or future Law in order to publish notices and protect the validity of this Lease. (c) Nothing in this Lease and no action or inaction by Landlord shall be deemed or construed to mean that Landlord has granted to Tenant any right, power or permission to do any act or to make any agreement which may create, give rise to, or be the foundation for, any right, title, interest or lien in or upon the estate of Landlord in any of the Leased Premises. (d) Landlord agrees from time to time at the request of Tenant (but at Tenant's sole cost and expense) (i) to grant easements, licenses, rights of way and other rights and privileges in the nature of easements for gas, electric, telephone and other utilities for the purpose of serving the Leased Premises, provided such easements shall, in the reasonable opinion of First Lender, have no more than a de minimis adverse effect on the value of the Leased Premises, (ii) to release similar existing utility easements and appurtenances which are for the benefit of the Leased Premises, and (iii) to execute and deliver any instrument necessary or appropriate to confirm such grants or releases to any person, with or without consideration but only in each case upon obtaining the prior approval of First Lender described in (i) above and delivery of (x) a certificate of the President or a Vice President of Tenant stating that such grant or release is not detrimental to the proper conduct of the business of Tenant, the consideration, if any, being paid for such grant or release, and that such consideration is being paid to Tenant and that such grant or release does not materially impair the use of the Leased Premises for the purposes for which it is then held by Tenant or materially impair its value; and (y) a duly authorized undertaking of Tenant, in form and substance satisfactory to Landlord, to the effect that Tenant will remain obligated under the terms of this Lease to the same extent as if such easement, license, right of way or other right or privilege had not been granted or released, and that Tenant will perform all obligations of the grantor or releasor under such instrument of grant or release. 10. Indemnification. (a) Tenant agrees to pay, protect, indemnify, save --------------- and hold harmless Landlord from and against any and all liabilities, losses, damages, penalties, costs, expenses (including all reasonable attorneys' fees and expenses), causes of action, suits, claims, demands or judgments of any nature whatsoever, howsoever caused, arising from (i) any of the Leased Premises or Adjoining Property or the use, non-use, occupancy, condition, design, construction, maintenance, repair or rebuilding of any of the Leased Premises or Adjoining Property, and any injury to or death of any person or any loss of or damage to any property in any manner arising therefrom, connected therewith or occurring thereon, whether or not Landlord has or should have knowledge or notice of the defect or conditions, if any, causing or contributing to said injury, death, loss, damage or other claim, (ii) any violation by Tenant of any provision of this Lease or of any contract or agreement to which Tenant is a party or of any Legal Requirement or Permitted Encumbrance, (iii) any Environmental Violation; or (iv) any other cause, provided, however, if any such liability, loss, damage, penalty, cost or expense, cause of action, suit, claim, demand or judgment results from any tortious act or omission of Landlord, its agents or employees, or if any such act - 13 - or omission is determined to be a breach or default by Landlord under this Lease, the foregoing indemnity of Tenant shall apply only to the extent of the insurance coverage maintained (or required to be maintained, if greater) by Tenant pursuant to the provisions of Paragraph 14 of this Lease. (b) In case any action or proceeding is brought against Landlord by reason of any such claim, (i) Tenant may, except in the event of a conflict of interest or a dispute between Tenant and Landlord during the continuance of an Event of Default, retain its own counsel and defend such action (it being understood that Landlord may, at Landlord's sole cost and expense, employ counsel of its choice to monitor the defense of any such action) and (ii) Landlord shall notify Tenant to resist or defend such action or proceeding by retaining counsel reasonably satisfactory to Landlord, and Landlord will cooperate and assist in the defense of such action or proceeding if reasonably requested so to do by Tenant. (c) The obligations of Tenant under this Paragraph 10 shall survive any termination, expiration or rejection in bankruptcy of this Lease. The obligations of Tenant under this Paragraph 10 shall also apply whether or not the act or omission giving rise to such indemnification occurred prior to the date of this Lease, except for indemnification obligations relating to Environmental Violations (which by definition arise only due to acts or omissions arising after the date hereof). 11. Maintenance and Repair. ---------------------- (a) Tenant shall at all times, including any Requisition period or any period of occupancy by others, maintain the Leased Premises and the Adjoining Property in good repair and appearance and, shall maintain the Equipment in good mechanical condition, except for ordinary wear and tear, and shall promptly make all Alterations (substantially equivalent in quality and workmanship to the original work) of every kind and nature, whether foreseen or unforeseen, which may be required to be made upon or in connection with any of the Leased Premises in order to keep and maintain the Land and Improvements in as good repair and appearance as they were on January 25, 1982, and the Equipment in as good mechanical condition as it was originally, except for ordinary wear and tear on such Land, Improvements and Equipment. Tenant shall do or cause others to do all shoring of the Leased Premises or Adjoining Property or of foundations and walls of the Improvements and every other act necessary or appropriate for the preservation and safety thereof, by reason of or in connection with any excavation or other building operation upon any of the Leased Premises or Adjoining Property, whether or not Landlord shall, by any Legal Requirement, be required to take such action or be liable for failure to do so. Landlord shall not be required to make any Alteration, whether foreseen or unforeseen, or to maintain any of the Leased Premises or Adjoining Property in any way, and Tenant hereby expressly waives the right to make Alterations at the expense of Landlord, which right may be provided for in any Law now or hereafter in effect. (b) In the event that any Improvement, now or hereafter constructed, shall encroach upon any property, street or right-of-way adjoining any of the Leased Premises or Adjoining Property, shall violate the provisions of any restrictive covenant affecting any of the Leased Premises, shall hinder or obstruct any easement or right-of-way to which any of the Leased Premises is subject, or shall impair the rights of others in, to or under any of the foregoing then, promptly after written request of Landlord, Tenant shall either (i) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation, hindrance, obstruction or impairment, whether the same shall affect Landlord, Tenant or both, or (ii) take such action as shall be necessary to remove such encroachments, hindrances or obstructions and to end such violations or impairments, including, if necessary, and if and to the extent permitted by First Lender an Alteration. Any such Alteration shall be made in conformity with the provisions of Paragraph 12. (c) Landlord shall have the right, upon notice to Tenant (or without notice in case of emergency), to enter upon any of the Leased Premises for the purpose of making any Alterations which may be necessary by the occurrence of an Event of Default by reason of Tenant's failure to comply with the provisions of subparagraphs (a) and (b) of this Paragraph 11. Except in case of emergency, the right of entry shall be exercised at reasonable times and at reasonable hours. The cost of any such entry together with the cost of all such Alterations shall be Additional Rent; and Tenant shall pay the same to Landlord, together with interest thereon at the Default Rate from the time of payment by Landlord until paid - 14 - by Tenant, immediately upon written demand therefor and upon submission of evidence of Landlord's payment of such costs. (d) Tenant shall, from time to time, replace with other operational equipment or parts (the "Replacement Equipment") any of the Equipment (the "Replaced Equipment") which shall have (i) become worn out, obsolete or unusable for the purpose for which it is intended, (ii) been taken by a Condemnation as provided in Paragraph 13(d) to the extent Replacement Equipment is required to service the portion of the Improvements remaining after such Condemnation, or (iii) been lost, stolen, damaged or destroyed as provided in Paragraph 14(h); provided, however, that the Replacement Equipment shall (l) be in good operating condition, (2) have a value and useful life at least equal to the value and estimated useful life of the Replaced Equipment immediately prior to the time that the Replaced Equipment had become so worn out, obsolete or unusable, so taken, or so lost, stolen, damaged or destroyed, and (3) be suitable for a use which is the same or similar to that of the Replaced Equipment. All Replacement Equipment shall become the property of Landlord, shall be free and clear of all liens and rights of others except for the Mortgage and the Permitted Encumbrances and shall become a part of the Equipment to the same extent as the Replaced Equipment had been. If so requested by Landlord in writing, Tenant shall cause to be executed and delivered to Landlord, effective as of the expiration of the applicable Term or the sooner termination of this Lease, an invoice, bill of sale or other appropriate instrument evidencing the transfer or assignment to Landlord of all estate, right, title and interest of Tenant or any other party in and to the Replacement Equipment, free from all liens and other exceptions to title except as aforesaid; and Tenant shall pay all taxes, fees, costs and other expenses that may become payable as a result thereof. At the expiration of the Term or the sooner termination of this Lease, the Equipment shall be in good operating condition, ordinary wear and tear excepted. (e) Tenant acknowledges that it has been advised by Gibson Greetings, Inc., a prior tenant of the Leased Premises pursuant to a Lease Agreement dated January 25, 1982, that expired contemporaneously with the execution of this Lease, that the roof over certain portions of the Improvements is anticipated to need major repairs within the next few years. Tenant further acknowledges that Paragraph 11(a) of this Lease obligates Tenant, and not Landlord, to maintain the roof in as good repair and appearance as it was on January 25, 1982, ordinary wear and tear excepted. Tenant has requested that Landlord grant Tenant a period of six (6) months following the date of this Lease ("Roof Evaluation Period") to evaluate the condition of the roof and to identify those areas of the roof that are not presently in good condition and are in need of repair. Prior to the expiration of the Roof Evaluation Period, Tenant shall (i) notify Landlord in writing of the results of Tenant's evaluation of the condition of the roof and of Tenant's intended action including with such notice a copy of the contractor proposal accepted by Tenant; (ii) commence all necessary roof repair work; and (iii) thereafter promptly and with due diligence complete the same. All such work shall be done at Tenant's sole cost and expense in a good and workmanlike manner and in conformity with the requirements of this Lease. Landlord agrees Athat during the Roof Evaluation Period Landlord shall not assert that the Tenant is in default of its obligation to maintain and repair the roof as expressed in this Lease. Such forebearance by Landlord is expressly without prejudice to Landlord's rights and remedies under this Lease following the expiration of the Roof Evaluation Period on May 15, 1996. 12. Alterations. (a) Tenant shall at its expense, from time to time, have ----------- the right to make Alterations, construct upon the Land additional Improvements, install equipment in the Improvements or accessions to the Equipment, and in the course of same demolish portions or all of existing improvements provided that (aa) the proposed Alterations, additions or other improvements or equipment or accessions thereto shall not reduce the value of the Leased Premises or its usefulness, (bb) all such Alterations, construction and installations shall be performed in a good and workmanlike manner, (cc) all such Alterations, construction and installations shall be expeditiously completed in compliance with all Legal Requirements, (dd) all work done in connection with any such Alteration, construction or installation shall comply with the requirements of any insurance policy required to be maintained by Tenant hereunder, (ee) Tenant shall promptly pay all costs and expenses of any such Alteration, construction or installation and shall discharge all liens filed against any of the Leased Premises arising out of the same, (ff) Tenant shall procure and pay for all permits and licenses required in connection with any such Alteration, construction or installation, (gg) all such Alterations, construction and installations shall be the property of Landlord and shall be subject to this Lease, (hh) Tenant shall obtain in advance the written consent, which consent shall not be unreasonably withheld, of Landlord and First Lender for all improvements in excess of 5% of the - 15 - Termination Value for the respective Leased Premises and (ii) Tenant shall comply, to the extent requested by Landlord, with the provisions of Paragraph 12(c) below. (b) Tenant may, at its expense, install and remove additional equipment and machinery used or useful in Tenant's business, which equipment and machinery shall remain the property of Tenant and not become part of the real estate, provided that Tenant agrees in connection with any installation of additional equipment or machinery, to comply with the provisions of subsections (aa), (bb), (cc), (dd), (ee), and (ff) of Paragraph 12(a) above. Any equipment of Tenant not removed by Tenant within 15 days after the expiration or earlier termination of this Lease shall be considered abandoned by Tenant and may be appropriated, sold, destroyed or otherwise disposed of by Landlord without first giving notice thereof and without obligation to account therefor. Tenant agrees to pay all costs and expenses incurred in removing, storing and disposing of Tenant's equipment. Tenant will repair, at its expense, all damage to the Leased Premises caused by removal of Tenant's equipment whether effected by Landlord or Tenant. Landlord shall not be responsible for any loss or damage to Tenant's equipment under any circumstances. Landlord shall, from time to time upon Tenant's written request, execute appropriate documents for the benefit of equipment lenders or lessors confirming the provisions of this Paragraph 12(b). (c) If the estimated cost of such Alterations is equal to or exceeds $250,000, (i) prior to commencement of restoration, the architects, contracts, contractors, plans and specifications for the Alterations shall have been approved by Landlord which approval shall not be unreasonably withheld, and Landlord shall be provided with mechanics' lien insurance or such other reasonable assurance against mechanics' liens, accrued or inchoate, as Landlord shall require and acceptable performance and payment bonds, which are in an amount and form and have a surety reasonably acceptable to Landlord, and name Landlord and First Lender each as additional obligees; and (ii) at the time construction of any Alteration is proposed to commence, no Event of Default or event which would constitute an Event of Default by notice or grace period or both shall exist and no mechanics' or materialmen's liens shall have been filed and remain undischarged except as permitted pursuant to Paragraph 9(a) above. 13. Condemnation. ------------ (a) Tenant, immediately upon obtaining knowledge of the institution of any proceeding for Condemnation, shall notify Landlord thereof and Landlord shall be entitled to participate, with Tenant in any Condemnation proceeding at Tenant's expense. Subject to the provisions of this Paragraph 13 and Paragraph 15, Tenant hereby irrevocably assigns to Landlord any award or payment to which Tenant is or may be entitled by reason of any Condemnation, whether the same shall be paid or payable for Tenant's leasehold interest hereunder or otherwise but nothing in this Lease shall impair Tenant's right to any award or payment on account of Tenant's trade fixtures, equipment or other tangible property, moving expenses, loss of business and the like, if available, to the extent Tenant shall have a right to make a separate claim therefor against the appropriate governmental authority, but in no event shall any such separate claim be based upon the value of Tenant's leasehold interest. To the extent of such right Tenant shall not be deemed to have assigned the same to Landlord. (b) If (i) the entire Leased Premises or (ii) any substantial portion of the Leased Premises, which portion, in Tenant's judgment, is sufficient to render the remaining portion thereof unsuitable or uneconomic for the use of Tenant or any other tenant to which the Leased Premises might be leased, shall be taken by a Taking or (iii) First Lender shall retain the Net Award pursuant to the Assignment, then Tenant shall, in the case of (i) above and may, in the case of (ii) and (iii) above, not later than thirty (30) days after any such Taking, give notice to Landlord of its intention to terminate this Lease on any Basic Rent Payment Date specified in such notice, which date (the "Condemnation Termination Date") shall not be prior to the actual date of the vesting of title in the condemning authority. Such notice shall contain (1) an irrevocable offer of Tenant to purchase the remaining portion of the Leased Premises, (or in the case of a Taking of the entire Leased Premises, the Net Award payable in connection with such Taking or the right to receive the same when made, if payment thereof has not yet been made) on the Condemnation Termination Date at an amount (the "Offer Amount") not less than the Termination Value for the Leased Premises, and (2) in the event that Tenant seeks to terminate this Lease pursuant to clause (ii) of this paragraph 13(b), a certificate of Tenant, signed by the President or a Vice President thereof, stating that the portion of the Leased Premises so taken is sufficient to fulfill the conditions set forth in clause (ii) of - 16 - this Paragraph 13(b) and certifying that Tenant will forever abandon operations on the remainder of the Leased Premises. Tenant agrees that no rejection of an offer hereunder shall be effective for any purpose unless consented to by First Lender. If Landlord shall reject such offer by notice to Tenant containing the written consent of First Lender to such rejection not later than the twentieth day prior to the Condemnation Termination Date, then upon (i) payment of all installments of Basic Rent, Additional Rent and any other charges then due and unpaid and (ii) compliance by Tenant with all its other obligations and liabilities under this Lease which have arisen on or prior to the Condemnation Termination Date, this Lease shall terminate as to the entire Leased Premises, and Tenant shall immediately vacate and have no further right, title or interest in or to any of the Leased Premises and the Basic Rent Installments shall abate as of the Condemnation Termination Date and Tenant shall receive a refund of any Basic Rent paid by Tenant which is attributable to the period following the Condemnation Termination Date. Unless Landlord shall have rejected such offer by the foregoing notice to Tenant not later than the twentieth day prior to the Condemnation Termination Date, Landlord shall be conclusively presumed to have accepted such offer. On the Condemnation Termination Date, Tenant shall pay to Landlord the Offer Amount and, provided an Event of Default does not exist hereunder, Landlord shall convey to Tenant or its designee the remaining portion of the Leased Premises, if any, in accordance with the provisions of Paragraph 16, at the option of Tenant, and Landlord shall (i) assign to Tenant or its designee its entire interest in and to the Net Award; (ii) deliver to Tenant such Net Award or any part thereof which shall have been received by Landlord; or (iii) credit the full amount of the Net Award against the Offer Amount. Commencing on any Condemnation Termination Date, the installments of Basic Rent shall be reduced by the amount equal to the product of the Basic Rent payable immediately prior to such Taking multiplied by a fraction, the numerator of which shall be the amount of the Net Award so retained and the denominator of which shall be the sum of the then Termination Values for the Leased Premises or portion thereof remaining after all prior reductions in Basic Rent pursuant to this Paragraph 13 or Paragraph 15. (c) In the event of any Condemnation of any of the Land or Improvements which does not result in a Termination of this Lease, the Term shall nevertheless continue and there shall be no abatement or reduction of Basic Rent, Additional Rent or any other sums payable by Tenant hereunder, except as specifically provided in this subparagraph (C). Subject to the requirements of Paragraph 15, the Net Award of such Condemnation shall be retained by Landlord and, promptly after such Condemnation and payment of the Net Award to Landlord, Tenant, in conformity with the provisions of Paragraph 11(a), shall commence and diligently continue to restore the Land and Improvements as nearly as possible to their value, condition and character immediately prior to such Condemnation. Upon the Final Payment to Landlord of the Net Award of a Taking which falls within the provisions of this subparagraph (C), then Landlord shall make the Net Award available to Tenant for restoration, in accordance with the provisions of clauses (i) through (iv) Paragraph 15(a). If after Tenant restores as aforesaid a surplus remains from the Net Award, such surplus shall be retained by Landlord and each installment of Basic Rent after the Final Payment Date shall be reduced, in accordance with the provisions of Paragraph 15(b). In the event of a Requisition of any of the Land or Improvements, the Term shall not be reduced or affected in any way and Tenant shall continue to pay in full all Basic and Additional Rent stipulated in this Lease. Tenant shall be entitled to receive the entire Net Award; provided, however, that: (i) If the Requisition is for a period not extending beyond the Term and if such Net Award is made in a lump sum, the same shall be held in an interest- bearing investment or account approved by Tenant, Landlord and any First Lender by Chicago Title Insurance Company as condemnation trustee, as a fund which shall be withdrawn by Tenant on a pro rata basis (such proration to take into account the estimated amount of any future increases in Basic Rent which are to occur during the period of such Requisition and to allow a proportionate amount of interest accumulated to date to be withdrawn) on each Basic Rent Payment Date over the same time period as such Requisition, provided that if such Requisition results in changes or Alterations to the Leased Premises that would necessitate an expenditure - 17 - to restore the Leased Premises to its former condition, then Tenant shall make such restorations and a portion of the Net Award sufficient to pay the cost thereof shall be paid to Tenant in the manner specified in clauses (i) through (iv) of Paragraph 15(a) over the course of such restoration. (ii) If the Requisition is for a period extending beyond the Term of this Lease, the Net Award shall be apportioned on a present value basis between Landlord and Tenant as of the stated expiration date of the Term and Tenant's share thereof, if paid in a lump sum, shall be paid to the aforesaid condemnation trustee and applied in accordance with the provisions of clause (i) above; provided, however, that the portion of any Net Award required to pay for restoration, on a present value basis, shall remain the property of Landlord if the Term shall expire prior to such restoration. (d) If any of the Equipment shall be taken by a Condemnation other than a Condemnation which falls within the provisions of Paragraph 13(b), the Term shall nevertheless continue and there shall be no abatement or reduction of Basic Rent, Additional Rent or any other sums payable by Tenant hereunder. Tenant shall, whether or not the Net Award is sufficient for the purpose in addition to the other restorations and repairs required to be made by Tenant, promptly replace the Equipment so taken, in accordance with the provisions of Paragraph 11(d), and the Net Award of such a Condemnation shall thereupon be payable to Tenant. (e) No agreement with any condemnor in settlement of or under threat of any Condemnation shall be made by either Landlord or Tenant without the written consent of the other. Notwithstanding the foregoing provisions of this Paragraph 13, in the event Tenant, at its expense, makes leasehold improvements to the premises which are permitted by Paragraph 12, having a cost in excess of $100,000, and for which Tenant is not reimbursed, Tenant shall have the right to claim in any condemnation proceeding for and, subject to the prior payment of the indebtedness secured by the Mortgage, shall be entitled to receive out of any condemnation award or payment, the then fair market value of such leasehold improvements. 14. Insurance. --------- (a) Tenant shall maintain at its sole cost and expense, the following insurance with deductible provisions not exceeding $250,000 per occurrence: (i) Insurance against loss or damage to the Improvements and Equipment by fire and other risks from time to time included under standard extended and additional extended coverage policies, vandalism and malicious mischief, sprinkler, plate glass and flood, in amounts not less than the actual replacement value of the Improvements and Equipment, excluding footings and foundations and other parts of the Improvements which are not insurable. Such policies shall contain the "Replacement Cost" Endorsement. (ii) General public liability insurance against claims for bodily injury, death or property damage occurring on, in or about any of the Leased Premises or the Adjoining Property, in an amount not less than $5,000,000 Dollars for bodily injury or death to any one person, not less than $10,000,000 Dollars for any one accident, and not less than $1,000,000 Dollars for property damage. Policies for such insurance shall be for the mutual benefit of Landlord, Tenant and First Lender. (iii) Workmen's compensation insurance covering all persons employed in connection with any work done on or about any of the Leased Premises for which claims for death or bodily injury could be asserted against Landlord, Tenant or any of the Leased Premises, or in lieu of such workmen's compensation insurance, a program of self-insurance complying with the rules, regulations and requirements of the appropriate agency of the State from time to time in force. (iv) Boiler and pressure vessel insurance on any of the Equipment which by reason of its use or existence is capable of bursting, erupting, collapsing or exploding, in an amount not less than $5,000,000 Dollars for damage to property, bodily injury or death resulting from such perils. (v) Such other insurance, including war-risk if and to the extent available from the United States Government or any agency thereof, on any of the Leased Premises as Landlord and - 18 - First Lender may require, which at the time is commonly obtained in connection with properties similar to the Leased Premises. (b) The insurance required by Paragraph 14(a) shall be written by companies of recognized financial standing which are authorized to do an insurance business in the appropriate State and which are rated by A-XV or better by A. M. Best Company, Inc. The insurance policies (i) shall be for such terms as Landlord shall give its approval, which approval shall not be unreasonably withheld or delayed, (ii) shall be in amounts sufficient at all times to satisfy any co-insurance requirements thereof and (iii) shall name Landlord and Tenant as insured parties, as their respective interests may appear. If said insurance or any part thereof shall expire, be withdrawn, become void by breach of any condition thereof by Tenant or become void or unsafe by reason of the failure or impairment of the capital of any insurer, or if for any other reason whatsoever said insurance shall not be reasonably satisfactory to Landlord, Tenant shall immediately obtain new or additional insurance satisfactory to Landlord. (c) Each insurance policy referred to in clauses (i), (iv) and (v) of Paragraph 14(a) shall contain standard non-contributory mortgagee clauses in favor of and acceptable to First Lender and shall provide that all property losses insured against shall be adjusted by Tenant (subject to Landlord's and First Lender's approval of final settlement of estimated losses of $750,000 or more). Each policy shall provide that it may not be cancelled except after 30 days prior notice to Landlord and First Lender and that any loss otherwise payable thereunder shall be payable notwithstanding (i) any act or omission of Landlord or Tenant which might, absent such provision, result in a forfeiture of all or a part of such insurance payment, (ii) the occupation or use of any of the Leased Premises for purposes more hazardous than permitted by the provisions of such policy, (iii) any foreclosure or other action or proceeding taken by First Lender pursuant to any provision of the Mortgage upon the happening of an event of default therein, or (iv) any change in title or ownership of any of the Leased Premises. (d) Tenant shall pay as they become due all premiums for the insurance required by this Paragraph 14, shall renew or replace each policy, shall deliver to Landlord evidence of the payment of the full premium therefor with the affidavit of the chief financial officer of Tenant required under Paragraph 26, and shall deliver to Landlord all original policies or duplicate originals; and in the event of Tenant's failure to comply with any of the foregoing requirements, Landlord shall be entitled, two days after giving notice to Tenant, to procure such insurance if Tenant shall not have complied with the foregoing requirements prior to the expiration of such two-day period. Any sums expended by Landlord in procuring such insurance shall be Additional Rent and shall be repaid by Tenant, together with interest thereon at the Default Rate from the time payment is due until fully paid by Tenant, within five (5) days of written demand therefor by Landlord. (e) Anything in this Paragraph 14 to the contrary notwithstanding, any insurance which Tenant is required to obtain pursuant to Paragraph 14(a) may be carried under a "blanket" policy or policies covering other properties or liabilities of Tenant, and may be effected by a combination of basic and excess or umbrella policies, provided that such "blanket" policy or policies otherwise comply with the provisions of this Paragraph 14. The amount of the total insurance allocated to the Leased Premises, which amount shall be not less than the amounts required pursuant to this Paragraph 14, shall be specified either (i) in each such "blanket" policy, or (ii) in a written statement, which Tenant shall deliver to Landlord, from the insurer thereunder. (f) Tenant shall promptly comply with and conform to (i) all provisions of each insurance policy and (ii) all requirements of the insurers thereunder, applicable to Landlord, Tenant or any of the Leased Premises or to the use, manner of use, occupancy, possession, operation, maintenance, alteration or repair of any of the Leased Premises, even if such compliance necessitates structural changes or improvements or results in interference with the use or enjoyment of any of the Leased Premises. Tenant shall not use any of the Leased Premises in any manner which would permit the insurer to cancel any insurance policy unless Tenant obtains, prior to such cancellation, substitute insurance in accordance with the provisions of this Paragraph 14 which permits such use of the Leased Premises. (g) In the event of any loss in excess of $25,000, Tenant shall give Landlord immediate notice thereof. Tenant is hereby authorized to adjust, collect and compromise, in its discretion, all claims under any of the insurance policies required by this Paragraph 14 (subject to Landlord's and First - 19 - Lender's approval of final settlement of estimated losses of $750,000 or more) and to execute and deliver all necessary proofs of loss, receipts, vouchers and releases required by the insurers; and Tenant agrees to sign, upon request of Landlord, all such proofs of loss, receipts, vouchers and releases. Landlord and First Lender shall have the right to prosecute or contest, or to require Tenant to prosecute or contest, any claim, adjustment, settlement or compromise in the amount of $750,000 or more. Landlord will join in, at Tenant's request, any prosecution of a claim against, or contesting of any settlement proposed by, an insurer, provided Tenant indemnifies Landlord against all costs, liabilities and expenses in connection with the prosecution of such contest. All proceeds of any insurance required under clauses (i), (ii), (iv) and (v) of Paragraph 14(a) shall be payable to First Lender, or at its option an insurance trustee designated by First Lender, and reasonably satisfactory to Landlord and Tenant, or if there be no First Lender then an insurance trustee selected by Landlord and reasonably satisfactory to Tenant and each insurer is hereby authorized and directed to make payment under said policies, except for return of unearned premiums or dividends which shall be paid to Tenant, directly to First Lender or such insurance trustee (instead of to Landlord and Tenant jointly) for disbursement in accordance with the provisions of this Lease; and Tenant hereby appoints Landlord and First Lender and each of them as Tenant's attorneys-in- fact to endorse any draft therefor. If Landlord is an Institutional Investor and there is no First Lender then Landlord or an insurance trustee designated by Landlord and reasonably satisfactory to Tenant shall receive and disburse the insurance proceeds specified in the immediately preceding sentence. In the event of any casualty (whether or not insured against and whether or not, if insured against, the Net Proceeds, if any, available for restoration shall be sufficient to pay for such) resulting in damage to any of the Leased Premises, the Term shall nevertheless continue and there shall be no abatement or reduction of Basic Rent, Additional Rent or any other sums payable by Tenant hereunder, except as hereinafter in this subparagraph (g) specifically provided. Subject to the provisions of Paragraph 15, the Net Proceeds of such casualty shall be retained by Landlord and, except as hereinafter specifically provided in subparagraph (h) following, Tenant shall promptly after such casualty (whether or not insured against and whether or not, if insured against, the Net Proceeds, available for restoration, shall be sufficient to pay for such restoration so long as the First Lender does not retain the Net Proceeds pursuant to the Mortgage), as required in Paragraph 11(a), commence and diligently continue to restore the Land and Improvements as nearly as possible to their value, condition and character immediately prior to such damage, in accordance with the provisions of clauses (i) through (iv) of Paragraph 15(a); provided, however, in no event shall Tenant be required to restore if First Lender is entitled to retain the Net Proceeds pursuant to the Mortgage or if the casualty is uninsurable under the policies required to be maintained by Tenant hereunder, and in the reasonable judgment of First Lender, the fair market value of the Leased Premises is not materially impaired by such damage. In the event the Net Proceeds exceed the Termination Value for such Premises, then unless Landlord and Tenant shall agree, if so requested by First Lender, to extend the remaining term of this Lease (including any Renewal Term exercised by Lessee) to a term at least 15 years beyond the Final Payment Date of said Net Proceeds, First Lender shall be entitled to retain such Net Proceeds. Upon payment to Landlord of such Net Proceeds, Landlord shall make the Net Proceeds available to Tenant for restoration, in accordance with the provisions of Paragraph 15(a). If, after tenant restores as aforesaid a surplus remains from the Net Proceeds, such surplus shall be retained by Landlord and each instalment of Basic Rent payable on and after the Final Payment Date shall be reduced, in accordance with the provisions of Paragraph 15(b). In the event of any loss of any of the Equipment which does not fall within the provisions of the immediately preceding paragraph, the Term shall nevertheless continue and there shall be no abatement or reduction of Basic Rent, Additional Rent or any other sums payable by Tenant hereunder. Tenant shall, whether or not the Net Proceeds are sufficient for the purpose, promptly repair or replace such Equipment, in accordance with the provisions of Paragraph 11(c), and the Net Proceeds of such loss shall thereupon be payable to Tenant. (h) If (i) the entire Leased Premises or (ii) all or any substantial portion of the Leased Premises, which portion, in Tenant's judgment, is sufficient to render the remaining portion thereof unsuitable or uneconomical for restoration for continued use and occupancy by Tenant or any other tenant to which the Leased Premises might be leased, shall be damaged or destroyed by fire or other casualty, or if (iii) the First Lender shall retain the Net Proceeds payable as a result of said fire or other casualty pursuant to the Mortgage, then Tenant may, not later than ninety (90) days after such occurrence, give notice to Landlord of its intention to terminate this Lease on any Basic Rent Payment Date specified in such notice, as to the entire Leased Premises, which date (the "Casualty Termination Date") shall be not less than ninety (90) nor more than one hundred twenty (120) days after such notice. Such notice shall contain - 20 - (1) an irrevocable offer of Tenant to purchase the Leased Premises on the Casualty Termination Date at an amount (the "Offer Amount") not less than the Termination Value for the entire Leased Premises, and (2) in the event that Tenant seeks to terminate this Lease pursuant to clause (ii) of this Paragraph 14(h), a certificate of Tenant, signed by the President or a Vice President thereof, stating that the portion of the Leased Premises so damaged or destroyed is sufficient to fulfill the conditions set forth in clause (ii) of this Paragraph and certifying that Tenant will not restore the Leased Premises for the use to which such premises was devoted prior to such damage or destruction. Tenant agrees that no rejection of an offer hereunder shall be effective for any purpose unless consented to by First Lender. If Landlord shall reject such offer by notice to Tenant containing the written consent of First Lender not later than the twentieth day prior to the Casualty Termination Date, then upon (i) payment of all installments of Basic Rent, Additional Rent and any other charges then due and unpaid and (ii) compliance by Tenant with all other obligations and liabilities under this Lease which have arisen on or prior to the Casualty Termination Date, this Lease shall terminate, and Tenant shall immediately vacate and have no further right, title or interest in or to any of the Leased Premises. Unless Landlord shall have rejected such offer by the foregoing notice to Tenant not later than the twentieth day prior to the Casualty Termination Date, Landlord shall be conclusively presumed to have accepted such offer. On the Casualty Termination Date, Tenant shall pay to Landlord the Offer Amount, Landlord shall convey to Tenant or its designee the Leased Premises or appropriate portion thereof in accordance with the provisions of Paragraph 16 and, at the option of Tenant, Landlord shall (i) assign to Tenant or its designee all rights to receive the Net Proceeds payable in connection with such damage or destruction; (ii) deliver to Tenant such Net Proceeds or any part thereof which shall have been received by Landlord; or (iii) credit the full amount of the Net Proceeds against the Offer Amount. (i) Tenant shall not carry separate insurance concurrent in form or contributing in the event of loss with that required in this Paragraph 14 unless (i) Landlord is included therein as a named insured, with loss payable as provided herein, and (ii) such separate insurance complies with the other provisions of this Paragraph 14. Tenant shall immediately notify Landlord of such separate insurance and shall deliver to Landlord duplicate original policies therefor. 15. Restoration; Reduction of Rent. ------------------------------ (a) Unless the Net Proceeds or Net Award are retained by First Lender pursuant to the Assignment, Landlord shall cause the Net Proceeds or Net Award to be disbursed in accordance with the following conditions: (i) if the estimated cost of restoration is equal to or exceeds $250,000, prior to commencement of restoration, the architects, contracts, contractors, plans and specifications for the restoration shall have been approved by Landlord, and Landlord shall be provided with mechanics' lien insurance or such other reasonable assurance against mechanics' liens, accrued or inchoate, as Landlord may reasonably require and acceptable performance and payment bonds reasonably acceptable to Landlord in an amount and form and have a surety reasonably acceptable to Landlord, and name Landlord and First Lender each as additional obligees; (ii) at the time of any disbursement, no Event of Default or event which would constitute an Event of Default by notice or grace period or both shall exist and no mechanics' or materialmen's liens shall have been filed and remain undischarged except as permitted pursuant to Paragraph 9(a) above; provided that if any Event of Default shall be subsequently cured and the Lease restored to good standing, any disbursement withheld shall be promptly paid over to Tenant; (iii) if the estimated cost of restoration is equal to or exceeds $250,000, disbursements shall be made from time to time in an amount not exceeding the cost of the work completed since the last disbursement, upon receipt of (1) satisfactory evidence, including architects' certificates, of the stage of completion, of the estimated cost of completion and of performance of the work to date in a good and workmanlike manner in accordance with the contracts, plans and specifications, (2) waivers of liens, (3) contractors' and subcontractors' sworn statements, (4) a satisfactory bringdown of title insurance, and (5) other evidence of cost and payment so that Landlord can verify that the amounts disbursed from - 21 - time to time are represented by work that is completed, in place and free and clear of mechanics' lien claims; or if the estimated cost of restoration is less than $250,000, such disbursement shall be made in a lump sum payment upon Final Payment by the insurer, subject to satisfaction of the condition set forth in clause (ii) of this Paragraph 15(a). (iv) each request for disbursement shall be accompanied by a certificate of Tenant, signed by the President or any Vice President thereof, describing the work for which payment is requested, stating the cost incurred in connection therewith and stating that Tenant has not previously received payment for such work; the certificate to be delivered by Tenant upon completion of the work shall, in addition, state that the work has been completed and complies with the applicable requirements of this Lease; (v) Landlord may retain ten percent of the restoration fund until the restoration is fully completed subject to reduction of the retained amount upon approval by First Lender in accordance with local custom; (vi) the restoration fund shall not bear interest but shall not be commingled with First Lender's or depositary's other funds; (vii) at all times the undisbursed balance of the restoration fund shall be not less than the cost of completing the restoration work free and clear of all liens; and (viii) Landlord may impose other reasonable conditions provided the same are also imposed upon such disbursements by the First Lender or any subsequent holder of a first mortgage or deed of trust. In addition, prior to commencement of restoration and at any time during restoration, if the estimated cost of restoration, exceeds the amount of the Net Proceeds or the Net Award available for such restoration, the amount of such excess shall be paid by Tenant to First Lender or depositary to be added to the restoration fund. Any sum which remains in the restoration fund upon completion of restoration shall be refunded to Tenant up to the amount of Tenant's deposits pursuant to the immediately preceding sentence. If no such refund is required or any sum remains in the restoration fund after such refund, such sum remaining in the restoration fund upon completion of restoration (the "Remaining Sum") shall be retained by Landlord. (b) In the event that there is a Remaining Sum upon completion of restoration, or if there is no damage in condemnation, then each installment of Basic Rent payable on or after the Final Payment Date or the Retention Date, as applicable, shall be reduced by an amount equal to the product of the Basic Rent payable immediately prior to such Date multiplied by a fraction, the numerator of which shall be the Net Proceeds or Net Award not made available for restoration by First Lender or the Remaining Sum, as the case may be, and the denominator of which shall be the then aggregate Termination Values for all the Leased Premises or portion thereof remaining after all prior reductions in Basic Rent pursuant to Paragraph 13 or this Paragraph 15. 16. Procedures Upon Purchase. ------------------------ (a) In the event of the purchase of any of the Leased Premises by Tenant pursuant to any provision of this Lease, Landlord need not transfer and convey to Tenant or its designee any better title thereto than that which was transferred and conveyed to Landlord, and Tenant shall accept such title, subject, however, to all liens, exceptions and restrictions on, against or relating to the Leased Premises and to all applicable laws, regulations and ordinances, but free of the lien of and security interest created by the Mortgage, the Assignment, and any and all other liens, exceptions and restrictions on, against or relating to the Leased Premises which have been created by or resulted from acts of Landlord, unless the same were created with the concurrence of Tenant. (b) Upon the date fixed for any such purchase of any of the Leased Premises pursuant to any provision of this Lease, Tenant shall pay to Landlord or to any person to whom Landlord - 22 - directs payment, at its address set forth above, or at any other place designated by Landlord, the Offer Amount therefor specified herein, or, as the case may be, the purchase price therefor as determined pursuant to the provisions of Paragraph 27, in lawful money of the United States, less any credits of the Net Award or Net Proceeds allowed against the Offer Amount pursuant to the provisions of Paragraphs 13(b) and 14(h), and Landlord shall thereupon deliver to Tenant (i) a special warranty deed which describes any of the Leased Premises then being sold to Tenant and conveys and transfers the title thereto which is described in Paragraph 16(a), together with (ii) such other instruments as shall be necessary to transfer to Tenant or its designee any other property (or rights to any Net Proceeds or Net Award not yet received by Landlord) then required to be sold by Landlord pursuant to this Lease and (iii) any Net Award or Net Proceeds received by Landlord and not credited to Tenant against the Offer Amount. Tenant shall pay all charges incident to such conveyance and transfer, including Landlord's reasonable counsel fees, escrow fees, recording fees, title insurance or guarantee premiums and all applicable federal, state and local taxes which may be incurred or imposed by reason of such conveyance and transfers and/or by reason of the delivery of said deed and other instruments. Upon the completion of such purchase, but not prior thereto (whether or not any delay in the completion of or the failure to complete such purchase shall be the fault of Landlord, provided that Tenant shall have the right to pursue its remedies, if any, against Landlord for such failure or delay except for those waived pursuant to Paragraph 7), this Lease and all obligations hereunder (including the obligations to pay Basic Rent and Additional Rent) shall terminate with respect to any of the Leased Premises conveyed to Tenant, except any obligations and liabilities of Tenant under this Lease which arose on or prior to such date of purchase; provided, however, that if there shall be a delay in the foregoing purchase and payment due to the fault of Landlord at any time after the First Note shall have been paid in full, all obligations imposed on Tenant pursuant to this Lease shall, if Tenant so elects in writing and thirty (30) days after delivery of written notice to Landlord, terminate with respect to the Leased Premises or portion thereof to be sold, as the case may be, as of the date provided in this Lease for completion of such purchase and payment (the "Closing Date"); provided, further, however, if the First Note shall not have been fully paid at the time of such delay caused by Landlord, the portion of the Basic Rent payable after the Closing Date in excess of the debt service on the First Note shall be held by the First Lender and not remitted to Landlord until First Lender receives written instructions jointly executed by Landlord and Tenant as to the disposition of all such funds or a final judgment of a court of competent jurisdiction has been delivered to First Lender instructing First Lender as to the disposition thereof. Any prepaid Basic Rent or other prepaid sums paid to Landlord shall be prorated as of the date the purchase is completed, and the prorated unapplied balance shall be deducted from the Offer Amount due to Landlord. No apportionment of any Impositions shall be made upon such purchase, Tenant being liable for payment thereof during the Term, as Tenant, and being liable thereafter as owner. 17. Assignment and Subletting. Tenant may not assign this Lease ------------------------- without the prior written consent of Landlord, which consent shall not be unreasonably withheld, nor shall Tenant sublet the Leased Premises in its entirety at any time without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that Tenant may sublet portions of the Leased Premises without such consent. Each sublease of any portion of the Leased Premises shall be subject and subordinate to the provisions of this Lease; if Tenant assigns all its rights and interest under this Lease, the assignee under such assignment shall expressly assume all the obligations of Tenant hereunder, including obligations, actual or contingent, of Tenant which may have arisen on or prior to the date of such assignment, by a written instrument delivered to Landlord at the time of such assignment; and no assignment or sublease made as permitted by this Paragraph shall affect or reduce any of the obligations of Tenant hereunder, and all such obligations shall continue in full force and effect as obligations of a principal and not as obligations of a guarantor, as if no assignment or sublease had been made. No assignment or sublease shall impose any obligations on Landlord under this Lease. Tenant shall, within ten (10) days after the execution and delivery of any such assignment, deliver a duplicate original copy thereof in recordable form to Landlord, and within ten (10) days after the execution and delivery of any such sublease, Tenant shall deliver a duplicate original copy thereof to Landlord. Upon the occurrence of an Event of Default under this Lease, Landlord shall have the right to collect and enjoy all rents and other sums of money payable under any sublease of any of the Leased Premises, and Tenant hereby irrevocably and unconditionally assigns such rents and money to Landlord, which assignment may be exercised upon and after (but not before) the occurrence of an Event of Default. From and after the date, if any, that such Event of Default is cured, such rents shall again become payable - 23 - to Tenant. Tenant shall not mortgage or pledge this Lease, and any such mortgage or pledge made in violation of this Paragraph shall be void. 18. Permitted Contests. Notwithstanding any provision of this Lease to ------------------ the contrary, Tenant shall not be required to (i) pay any Imposition, (ii) comply with any Legal Requirement or with the requirements of any insurance policy referred to in Paragraph 12(a), (iii) discharge or remove any lien referred to in Paragraph 9 or 12, or (iv) take any action with respect to any encroachment, violation, hindrance, obstruction or impairment referred to in Paragraph 11(b), so long as Tenant shall contest, in good faith and at its expense, the existence, the amount or the validity thereof, the amount of the damages caused thereby, or the extent of its or Landlord's liability therefor, by appropriate proceedings (or in the case of non-compliance with regulations of the National Fire Protection Association or said other body exercising similar function in accordance with the rules of such Board or body) which shall operate during the pendency thereof to prevent (i) the collection of, or other realization upon, the Imposition or lien so contested, (ii) the sale, forfeiture or loss of any of the Leased Premises, any Basic Rent or any Additional Rent to satisfy the' same or to pay any damages caused by the violation of any such Legal Requirement or by any such encroachment, violation, hindrance, obstruction or impairment, (iii) any interference with the use or occupancy of any of the Leased Premises, (iv) any interference with the payment of any Basic Rent or any Additional Rent, and (v) the cancellation of any fire or other insurance policy, unless such policy is replaced prior to its cancellation by a successor policy complying with the provisions of this Lease. Tenant shall provide security reasonably satisfactory to Landlord assuring the payment, compliance, discharge, removal and/or other action, including all costs, attorneys' fees, interest and penalties in the event that the contest is unsuccessful. If, and only if, any such proceedings are pending and the required security is held by Landlord, Landlord shall not have the right to pay, remove or cause to be discharged the Imposition or lien thereby being contested. Tenant further agrees that each such contest shall be promptly and diligently prosecuted to a final conclusion, except that Tenant shall, so long as the conditions of the first sentence of this Paragraph are at all times complied with, have the right to attempt to settle or compromise such contest through negotiations. Tenant shall pay, and save Landlord harmless against, any and all losses, judgments, decrees and costs (including all reasonable attorneys' fees and expenses) in connection with any such contest and shall, promptly after the final determination of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein or in connection therewith, together with all penalties, fines, interest, costs and expenses thereof or in connection therewith, and perform all acts the performance of which shall be ordered or decreed as a result thereof. No such contest shall subject Landlord to the risk of any civil or criminal liability. 19. Conditional Limitations; Default Provision. ------------------------------------------ (a) The occurrence of any one or more of the following shall constitute an Event of Default under this Lease: (i) a failure by Tenant to make (regardless of the pendency of any bankruptcy, reorganization, receivership, insolvency or other proceeding, in law, in equity, or before any administrative tribunal, which have or might have the effect of preventing Tenant from complying with the provisions of this Lease) any payment of Basic Rent, Additional Rent or other sum herein required to be paid by Tenant, which failure continues uncorrected for a period of 10 days or more after written notice thereof to Tenant; (ii) a failure by Tenant to duly perform and observe or a violation or breach of any other provision hereof or the Assignment of Lease to First Lender, which failure, violation or breach continues uncorrected for a period of 20 days or more after written notice thereof to Tenant, provided that, if such failure, violation or breach cannot be cured within a period of 20 days, then the same shall not be deemed to continue if Tenant proceeds promptly and with due diligence to cure the same and completes the curing thereof; (iii) Tenant or Guarantor shall (a) voluntarily be adjudicated a bankrupt or insolvent, (b) seek or consent to the appointment of a receiver or trustee for itself or for any of the Leased Premises, (c) file a petition commencing a voluntary case under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, (d) make a general assignment for the benefit of creditors, or (e) be unable to pay its debts as they mature; (iv) a court shall enter an order, judgment or decree appointing, with the consent of Tenant, a receiver or trustee for it or for any of the Leased Premises or approving a petition filed against Tenant which seeks relief under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, and such order, judgment or decree shall remain in force, undischarged or unstayed, ninety days after it is entered; (v) the Leased Premises shall have been abandoned; (vi) Tenant or Guarantor shall be liquidated or dissolved or shall begin proceedings towards its liquidation or dissolution, other than pursuant to the acquisition by a transferee corporation of substantially all the assets and an assumption by - 24 - such transferee of all liabilities provided the net worth of such transferee, after giving affect to such acquisition and assumption, computed in accordance with generally accepted accounting principles, is not materially less than that of the transferor corporation immediately prior to such acquisition; (vii) the estate or interest of Tenant in any of the Leased Premises shall be levied upon or attached in any proceeding and such estate or interest is about to be sold or transferred or such process shall not be vacated or discharged within ninety days after such levy or attachment; or (viii) any material adverse change in the financial condition of Tenant or Guarantor. (b) If an Event of Default shall have occurred, Landlord shall have the right at its option, then or at any time thereafter to do any one or more of the following without demand upon or notice to Tenant. (1) Landlord may give Tenant notice of Landlord's intention to terminate this Lease on a date specified in such notice. Upon the date therein specified, the Term, the estate hereby granted and all rights of Tenant hereunder, shall expire and terminate as if such date were the date hereinbefore fixed for the expiration of the Term, but Tenant shall remain liable for all its obligations hereunder, including its liability for Rent, as hereinafter provided. (2) Landlord may, whether or not the Term of this Lease shall have been terminated pursuant to clause (1) above, (a) give Tenant notice to surrender any of the Leased Premises to Landlord immediately or on a date specified in such notice, at which time Tenant shall surrender and deliver possession of the Leased Premises or the specified portion thereof to Landlord or (b) re-enter and repossess any of the Leased Premises by force, summary proceedings, ejectment or any other means or procedure. Upon or at any time after taking possession of any of the Leased Premises, Landlord may remove any persons or property therefrom. Landlord shall be under no liability for or by reason of any such entry, repossession or removal. No such entry or repossession shall be construed as an election by Landlord to terminate this Lease unless Landlord gives a written notice of such intention to Tenant pursuant to clause (1) above. (3) After repossession of any of the Leased Premises pursuant to clause (2) above, whether or not this Lease shall have been terminated pursuant to clause (1) above, Landlord shall use reasonable efforts to relet the Leased Premises or any part thereof, to such Tenant or Tenants for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) for such rent, on such conditions (which may include concessions or free rent) and for such uses as Landlord, in its absolute discretion, may determine; and Landlord may collect and receive any rents payable by reason of such reletting. Provided Landlord has used reasonable efforts to relet, Landlord shall not be responsible or liable for any failure to relet the Leased Premises or any part thereof. If Landlord shall use reasonable efforts to collect any rent due upon any reletting, it shall not be responsible for any failure to collect any said rent. Landlord may make such Alterations as Landlord, in its sole discretion may deem advisable. Tenant agrees to pay Landlord, as Additional Rent, immediately upon demand, all expenses incurred by Landlord in obtaining possession, in performing Alterations and in reletting any of the Leased Premises, including fees and commissions of attorneys, architects, agents and brokers. (4) Whether or not Landlord shall have collected any current damages pursuant to Paragraph 19(d), Landlord may, upon written demand to Tenant, recover from Tenant, and Tenant shall pay to Landlord, as and for liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the excess, if any, of (a) all Basic Rent and Additional Rent from the date of such demand for what would be the then unexpired term of this Lease in the absence of such expiration, termination, re-entry or repossession, discounted at the rate of 12% per annum over (b) the then fair rental value of the Leased Premises (determined by applying a discount rate of 12% per annum) for the same period. If any Law shall validly limit the amount of such liquidated final damages to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such Law. (5) Landlord may exercise any other right or remedy now or hereafter existing by Law or in equity. - 25 - (c) No expiration or termination of this Lease pursuant to Paragraph 19(b) (1) or any other provision of this Lease, by operation of law or otherwise, repossession of any of the Leased Premises pursuant to Paragraph 19(b) (2) or otherwise, or reletting of any of the Leased Premises pursuant to Paragraph 19(b) (3), shall relieve Tenant of any of its liabilities and obligations hereunder, including the liability for Basic and Additional Rent, all of which shall survive such expiration, termination, repossession or reletting. (d) In the event of any expiration or termination of this Lease or repossession of any of the Leased Premises by reason of the occurrence of an Event of Default, Tenant shall pay to Landlord Basic Rent, Additional Rent and all other sums required to be paid by Tenant to and including the date of such expiration, termination or repossession and, thereafter, Tenant shall, until the end of what would have been the Term in the absence of such expiration, termination or repossession, and whether or not any of the Leased Premises shall have been relet, be liable to Landlord for, and shall pay to Landlord monthly, on the Basic Rent Payment Dates as liquidated and agreed current damages (i) Basic Rent, Additional Rent and all other sums which would be payable under this Lease by Tenant in the absence of such expiration, termination or repossession, less (ii) the net proceeds, if any, of any reletting pursuant to Paragraph 19(b) (3), after deducting from such proceeds all of Landlord's expenses in connection with such reletting (including all repossession costs, brokerage commissions, legal expenses, attorneys' fees, employees' expenses, costs of Alterations and expenses of preparation for reletting). Tenant hereby agrees to be and remain liable for all sums aforesaid; and Landlord may recover such damages from Tenant and to institute and maintain successive actions or legal proceedings against Tenant for the recovery of such damages. Nothing herein contained shall be deemed to require Landlord to wait to begin such action or other legal proceedings until the date when the Term would have expired by limitation had there been no such Event of Default. (e) The words "enter," "re-enter," or "re-entry," as used in this Paragraph 19 are not restricted to their technical meaning. (f) With respect to any remedy or proceeding of Landlord hereunder, Tenant waives (a) any right to a trial by jury and (b) the service of any notice which may be required by a present or future law or decision. 20. Additional Rights of Landlord. ----------------------------- (a) No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing by law or in equity. Tenant acknowledges that time is of the essence in the performance of its obligations under this Lease. No failure of Landlord (i) to insist at any time upon the strict performance of any provision of this Lease or (ii) to exercise any option, right, power or remedy contained in this Lease shall be construed as a waiver, modification or relinquishment thereof. A receipt by Landlord of any Basic or Additional Rent or other sum due hereunder with knowledge of the breach of any provision contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in a writing signed by Landlord. In addition to the other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the provisions of this Lease, or to specific performance of any of the provisions of this Lease. (b) Tenant hereby waives and surrenders, for itself and all those claiming under it, including creditors of all kinds, (i) any right and privilege which it or any of them may have under any present or future law to redeem any of the Leased Premises or to have a continuance of this Lease after termination of this Lease or of Tenant's right of occupancy or possession pursuant to any court order or any provision hereof, and (ii) the benefits of any present or future law which exempts property from liability for debt or for distress for rent. (c) Tenant shall pay to Landlord, as Additional Rent, all the expenses incurred by Landlord in connection with any Event of - 26 - Default or the exercise of any remedy by reason of an Event of Default, including reasonable attorneys' fees and expenses. If Landlord shall be made a party to any litigation commenced against Tenant or any litigation pertaining to this Lease or any of the Leased Premises, at the option of Landlord, Tenant, at its expense, shall provide Landlord with counsel reasonably satisfactory to Landlord and, in any event, Tenant shall pay all costs and reasonable attorneys' fees incurred or paid by Landlord in connection with such litigation; provided, however, if Landlord (but not First Lender or its nominee as successor Landlord) shall be the losing party as to any claim by Landlord against Tenant, then Landlord shall not be entitled to reimbursement by Tenant for any expenses incurred by Landlord in pursuing such claim against Tenant. 21. Notices. All notices, demands, requests, consents, approvals, offers, -------- statements and other instruments or communications required or permitted to be given pursuant to the provisions of this Lease shall be in writing and shall be deemed to have been given for all purposes when delivered in person or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed to the other party at its address stated above. For the purposes of this Paragraph, any party may substitute its address by giving fifteen days' notice to the other party, in the manner provided above. 22. Estoppel Certificates. Landlord or Tenant, as the case may be, shall, --------------------- at any time and from time to time, upon not less than twenty days' prior written request by the other, execute, acknowledge and deliver to the requesting party a statement in writing, executed by a general partner of Landlord or by the President or a Vice President of Tenant, as the case may be, certifying (i) that this Lease is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications), (ii) the dates to which Basic Rent, Additional Rent and all other sums payable hereunder have been paid, (iii) that to the knowledge of the signer of such certificate no default by either Landlord or Tenant exists hereunder or specifying each such default of which the signer may have knowledge; and (iv) that, in the case of any statement being given by Tenant, to the knowledge of the signer of such certificate, there are no proceedings pending or threatened against Tenant before or by any court or administrative agency which, if adversely decided, would materially and adversely affect the financial condition and operations of Tenant, or if any such proceedings are pending or threatened to said signer's knowledge, specifying and describing the same. It is intended that any such statements may be relied upon by First Lender, Landlord or their assignees or by any prospective purchaser of the Leased Premises or by any transferee or assignee of Tenant's interest in the Lease or a sublessee of Tenant. Any certificate required under this Paragraph 22 shall (i) state briefly the nature and scope of the examination or investigation upon which the statements contained in such certificate are based, (ii) state that in the opinion of each person signing such certificate he has made such examination or investigation as is necessary to enable him to express an informed opinion as to the subject matter of such certificate, and (iii) certify to the correctness of the statements contained therein. 23. Surrender. Upon the expiration or earlier termination of this Lease, --------- Tenant shall peaceably leave and surrender the Leased Premises (except for any portion thereof with respect to which this Lease has previously terminated) to Landlord in the same condition in which the Leased Premises were originally received from Landlord at the commencement of this Lease, except as repaired, rebuilt, restored, altered, replaced, added to or destroyed as permitted or required by any provision of this Lease, and except for ordinary wear and tear. Tenant shall remove from the Land and Improvements on or prior to such expiration or earlier termination, trade fixtures, machinery, equipment or other all property situated thereon which is owned by Tenant or third parties other than Landlord and Tenant, at its expense, shall, on or prior to such expiration or earlier termination, repair any damage caused by such removal. Property not so removed shall become the property of Landlord, and Landlord may thereafter cause such property to be removed from the Leased Premises and the cost of removing and disposing of such property and repairing any damage to any of the Leased Premises caused by such removal shall be borne by Tenant. Landlord shall not in any manner or to any extent be obligated to reimburse Tenant for any property which becomes the property of Landlord as a result of such expiration or earlier termination. 24. Risk of Loss. The risk of loss or of decrease in the enjoyment and ------------ beneficial use of any of the Leased Premises in consequence of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosure, attachments, levies or executions (other than by Landlord and those claiming from, through or under Landlord) is assumed by Tenant, and Landlord shall in no event be answerable or accountable therefor. Except as otherwise - 27 - specifically provided in this Lease none of the events mentioned in this Paragraph shall entitle Tenant to any abatement of Basic Rent or Additional Rent; provided, however, in no event shall Tenant be required to pay more than the Basic Rent or Additional Rent due under Paragraph 6 of this Lease notwithstanding any attachment, levy or execution thereon by any party claiming by, under, or through Landlord. 25. No Merger of Title. There shall be no merger of this Lease nor of the ------------------ leasehold estate created by this Lease with the fee estate in or ownership of any of the Leased Premises by reason of the fact that the same person, corporation, firm or other entity may acquire or hold or own, directly or indirectly, (a) this Lease or the leasehold estate created by this Lease or any interest in this Lease or in such leasehold estate, and (b) the fee estate or ownership of any of the Leased Premises or any interest in such fee estate or ownership; and no such merger shall occur unless and until all persons, corporations, firms and other entities having any interest in (i) this Lease or the leasehold estate created by this Lease and (ii) the fee estate in or ownership of the Leased Premises or any part thereof sought to be merged shall join in a written instrument effecting such merger and shall duly record the same. 26. Books and Records. Tenant shall keep adequate records and books of ----------------- account with respect the finances and business of Tenant generally, in accordance with generally accepted accounting principles consistently applied and shall permit Landlord by its agents, accountants and attorneys, to visit and inspect the Leased Premises and examine the records and books of account and to discuss the finances and business with the officers of Tenant, at such reasonable times as may be requested by Landlord. Tenant shall deliver to Landlord as soon as available to Tenant all publicly filed periodic reports, statements and other information relating to the financial condition of Guarantor, filed with and/or required by the Securities and Exchange Commission including, but not limited to, all filings of Form 10K and Form 10Q. Tenant shall also deliver to Landlord as soon as available annual financial statements of Tenant and such other relevant financial data as Landlord may reasonably require pertaining to Tenant or to the Leased Premises. All financial statements shall be accompanied by a certificate of the chief financial officer of Tenant, dated within five days of the delivery of such statements, stating that such officer knows of no default which has occurred and is continuing hereunder, or, if any such default has occurred and is continuing, specifying the nature and period of existence thereof and what action Tenant has taken or proposes to take with respect thereto and, except as otherwise specified, stating that, to the knowledge of the affiant, Tenant has fulfilled all of its obligations under this Lease which are required to be fulfilled on or prior to the date of such affidavit. THE FOREGOING PARAGRAPH SHALL HAVE NO FORCE OR EFFECT SO LONG AS TENANT IS PART OF THE GUARANTOR'S CONSOLIDATED REPORTING GROUP FOR PURPOSES OF FEDERAL INCOME TAXATION. 27. Option to Purchase. Landlord does hereby give and grant to Tenant the ------------------ option to purchase the Leased Premises at any time during the Term and any renewal term beginning January 1, 2002, so long as there is no monetary Event of Default which has not been cured both at the time of exercise of the option and at the time of title closing on the purchase. If there is a non-monetary Event of Default existing either at the time of the exercise of the option or at the time of title closing on the purchase which adversely affects the fair market value of the Leased Premises in the reasonable opinion of Landlord and Landlord and Tenant are unable to agree upon the purchase price, the arbitration appraisers who are to determine fair market value, as set forth below in this Paragraph 27, shall be instructed to disregard such default and, instead, determine fair market value as if Tenant were in full compliance with its obligations hereunder including, without limitation, its maintenance and repair obligations. Tenant may exercise its option to purchase the Leased Premises by giving Landlord at least six (6) months (but no more than 12 months) written notice of Tenant's intention to purchase the Leased Premises. If Tenant shall exercise its option to purchase the Leased Premises, the title closing shall take place on the date specified in Tenant's written notice, which date shall be at least six (6) months after the date of the notice, except that if the date specified is not a business day then the said title closing shall take place on the first business day following such date. All of the terms, covenants, and provisions contained in Paragraph 16 hereof shall apply to the sale and conveyance of the Leased Premises pursuant to this Paragraph 27. If this Lease shall terminate for any reason prior to the date originally fixed herein for - 28 - the expiration of the Term, the option provided in this Paragraph 27 and any exercise thereof by Tenant shall cease and terminate and shall be null and void. The purchase price to be paid by Tenant to Landlord upon the sale and conveyance of the Leased Premises pursuant to this Paragraph 27 shall be the greater of (a) $15,000,000, or (b) the fair market value of the Leased Premises as of the date of the exercise of the option to purchase by Tenant. However, in no event shall the purchase price exceed $16,250,000. The parties shall endeavor to agree upon such fair market value. Upon reaching such agreement, the parties shall execute an instrument setting forth such agreed fair market value. If the parties shall not have signed such agreement fixing such fair market value within thirty (30) days after the exercise by Tenant of its option to purchase, such fair market value shall be determined by arbitration as herein provided. Within sixty (60) days following the exercise by Tenant of its option to purchase, Tenant shall select an appraiser and shall notify Landlord in writing of the name and address of such appraiser. Within ten (10) days thereafter, Landlord shall select an appraiser and shall notify Tenant of the name and address of such appraiser. The appraiser selected by Tenant and the appraiser selected by Landlord shall endeavor to reach agreement upon the fair market value of the Leased Premises as of the date of the exercise of the option to purchase by Tenant. If the said two appraisers shall agree upon such fair market value, the amount of such fair market value as agreed by the said two appraisers shall be binding and conclusive upon Landlord and Tenant. If the appraiser selected by Tenant and the appraiser selected by Landlord shall be unable to agree upon such fair market value within twenty (20) days after the selection of an appraiser by Landlord, then the said two appraisers shall select a third appraiser to make the determination of such fair market value and the determination of such third appraiser shall be binding and conclusive upon Landlord and Tenant. In the event the appraiser selected by Tenant and the appraiser selected by Landlord shall be unable to agree upon the designation of a third appraiser within ten (10) days after the expiration of the aforesaid twenty (20) day period, then such third appraiser, at the request of either party, shall be selected by the President or Chairman of the American Arbitration Association in New York City, New York. The determination of fair market value made by the third appraiser appointed pursuant hereto shall be binding and conclusive upon Landlord and Tenant. The costs of the above described arbitration proceeding shall be borne equally by Landlord and Tenant. The appraisers shall have no right, power or authority to alter or modify the terms and provisions contained herein, and in determining the fair market value of the Leased Premises the appraisers shall utilize the definition of fair market value set forth herein. For the purposes of this Paragraph 27, the term "fair market value" shall mean the value of the Leased Premises vacant and free of this Lease and any and all other leases affecting the Leased Premises or any part thereof and free of the Mortgage and any other mortgages or deeds of trust. 28. Non-Recourse. Anything contained herein to the contrary ------------ notwithstanding, any claim based on or in respect of any liability of Tenant under this Lease shall be enforced only against the Leased Premises and not against any other assets, properties or funds of (i) Landlord or any director, officer, general partner, limited partner, employee or agent of Landlord (or any legal representative, heir, estate, successor assign of any thereof), (ii) any predecessor or successor partnership or corporation (or other entity) of Landlord, either directly or through Landlord or any predecessor or successor partnership or corporation (or other entity) of Landlord, or (iii) any other person or entity (including Carey Corporate Property, Inc., W. P. Carey & Co. Inc., Carey Corporate Property Management, Inc. or any person, corporation or other entity affiliated with any of the foregoing). 29. Miscellaneous. The paragraph headings in this Lease are used only for ------------- convenience in finding the subject matters and are not part of this Lease or to be used in determining the intent of the parties or otherwise interpreting this Lease. As used in this Lease, the singular shall include the plural as the context requires and the following words and phrases shall have the following meanings: (a) "including" shall mean "including but not limited to"; (b) "provisions" shall mean "provisions, terms, agreements, covenants and/or conditions"; (C) "lien" shall mean "lien, charge, encumbrance, title retention agreement, pledge, security interest, mortgage and/or deed of trust"; (d) "obligation" shall mean "obligation, duty, agreement, liability, covenant and/or condition" (e) "any of the Leased Premises" shall mean "the Leased Premises or any part thereof or interest therein"; (f) "any of the Land" shall mean "the Land or any part thereof or interest therein"; (g) "any of the Improvements" shall mean "the Improvements or any part thereof or interest therein"; (h) "any of the Equipment" shall mean "the Equipment or any part thereof or interest therein"; and (i) "any of the Adjoining Property" shall mean "the Adjoining Property or any part thereof or interest therein." Any act which Landlord is permitted to perform under this Lease may be - 29 - performed at any time and from time to time by Landlord or any person or entity designated by Landlord. Any act which Tenant is required to perform under this Lease shall be performed at Tenant's sole cost and expense. Each appointment of Landlord as attorney-in-fact for Tenant under this Lease is irrevocable and coupled with an interest. Landlord has the right to refuse to grant its consent subject to the express provisions set forth in this Lease governing the withholding of such consent by Landlord in certain circumstances. This Lease may be modified, amended, discharged or waived only by an agreement in writing signed by the party against whom enforcement of any such modification, amendment, discharge or waiver is sought. The covenants of this Lease shall run with the land and bind Tenant, the heirs, distributees, personal representatives, successors and assigns of Tenant, and all present and subsequent encumbrancers and subtenants of any of the Leased Premises, and shall inure to the benefit of Landlord, its successors and assigns. In the event there is more than one Tenant, the obligation of each shall be joint and several. In the event any one or more of the provisions contained in this Lease shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. This Lease will be simultaneously executed in several counterparts, each of which, when so executed and delivered, shall constitute an original, fully enforceable counterpart for all purposes except that only the counterpart stamped or marked "Counterpart Number I" shall constitute "chattel paper" or other "collateral" within the meaning of the Uniform Commercial Code in effect in any jurisdiction. This Lease shall be governed by and construed according to the law of the state of Tennessee. IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be duly executed under seal as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 2 By: W.P. Carey & Co., Inc., General Partner By:_______________________ CORPORATE PROPERTY ASSOCIATES 3 By: W.P. Carey & Co., Inc., General Partner By:_______________________ CLEO, INC. By______________________________ Chairman of the Board Attest:______________________ Secretary - 30 - EXHIBIT A Description of Leased Premises - 31 - EXHIBIT B List of Machinery and Equipment - ------------------------------- Any machinery, equipment or fixtures owned by Landlord and used in the operation of the buildings located on the Leased Premises or used for maintenance of the integrity of such buildings as buildings, including but without limitation thereto, all equipment, fixtures, systems and apparatus for the heating, lighting, plumbing, fire preventing, fire extinguishing, ventilating, air cooling and air conditioning of the said buildings; and all elevators, escalators, storm doors and windows, sump pump, partitions and ducts located on the Leased Premises. - 32 - EXHIBIT C Intentionally Omitted - 33 - EXHIBIT D Permitted Encumbrances All matters of record to the extent valid and enforceable. - 34 - EXHIBIT E Intentionally Omitted. - 35 - EXHIBIT F Rent Schedule A. Basic Rent for Initial Term: --------------------------- 1. Basic Rent. The Basic Rent due from November 15, 1995 through ---------- December 31, 2001 shall be $1,500,000 per annum, payable in monthly installments of $125,000 each, in advance, on the Basic Rent Payment Dates. Basic Rent for the month in which this Lease is executed shall be prorated for such month and paid to Landlord on the date this Lease is executed. 2. CPI Adjustments to Basic Rent. Basic Rent shall be subject to ----------------------------- adjustment, in the manner hereinafter set forth, for changes in the index known as "United States Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (CPI-U)," United States City Average, All Items (1982-84=100) ("CPI") or the successor index that most closely approximates the CPI. If the CPI shall be discontinued with no successor or comparable successor index, Landlord and Tenant shall attempt to agree upon a substitute index or formula, but if they are unable to so agree, then the matter shall be determined by arbitration in accordance with the rules of the American Arbitration Association then prevailing in New York City, New York. Any decision or award resulting from such arbitration shall be final and binding upon Landlord and Tenant and judgment thereon may be entered in any court of competent jurisdiction. 3. Effective Dates of CPI Adjustments. Basic Rent shall not be ---------------------------------- adjusted to reflect changes in the CPI until January 1, 2002 (the "Rent Adjustment Date"). As of the Rent Adjustment Date, Basic Rent shall be adjusted to reflect changes in the CPI during the period commencing November 1, 1995 and ending October 31, 2001. 4. Method of Adjustment. (a) On the Rent Adjustment Date, the -------------------- Rent in effect immediately prior to the Rent Adjustment Date shall be multiplied by a fraction, the numerator of which shall be the difference between (i) the Ending CPI and (ii) the Beginning CPI, and the denominator of which shall be the Beginning CPI. The product of such multiplication shall be added to the Basic Rent in effect immediately prior to such Rent Adjustment Date; provided, however, that the Basic Rent payable on and after the Rent Adjustment Date shall not be less than $1,689,300 per annum nor more than $1,897,950 per annum. (b) As used herein, "Beginning CPI" shall mean the CPI reported for the month of November 1995. As used herein, "Ending CPI" shall mean the CPI reported for the month of October 2001. (c) Effective as of the Rent Adjustment Date, Basic Rent payable under this Lease shall be the Basic Rent in effect after the adjustment provided for as of such Rent Adjustment Date. (d) Notice of the new annual Basic Rent shall be delivered to Tenant on or before the tenth (10th) day preceding the Rent Adjustment Date. B. Basic Rent for Renewal Terms. ---------------------------- 1. If Tenant exercises its option to renew the Lease, Basic Rent during such renewal term or terms, as the case may be, will be based on the fair market rental value of the Leased Premises determined as set forth in paragraph B.2 below. 2. (a) Landlord and Tenant shall endeavor to agree on fair market rental value at least eighteen (18) months prior to the date the then current Term is to expire. If Landlord and Tenant are unable to reach agreement on the fair market rental value of the Leased Premises within such time period, the procedure set forth in paragraph 27 for determining the fair market value of the Leased Premises shall - 36 - be followed except that the appraisers shall be instructed to determine the fair rental value, and not fair market value, with no "ceiling" or "floor" on the fair rental value. (b) In determining fair market rental value, the appraisers shall determine the amount that a willing tenant would pay, and a willing landlord of a comparable property located in a radius of 10 miles of the Leased Premises would accept, at arm's length, to rent a property of comparable size and quality as the Leased Premises during the extended term; taking into account: (a) the age, quality, and condition of the Improvements; (b) that the Leased Premises will be leased as a whole or substantially as a whole to a single user; (C) a lease term of five (5) years; (d) the fact that the lease will be a net lease of the exact type as this Lease; and (e) such other items that professional real estate appraisers customarily consider. (c) If, by virtue of any delay, fair market rental value is not determined by the expiration or termination of the then current Term, then until fair market rental value is determined, Tenant shall continue to pay Basic Rent during the succeeding renewal term in the same amount which it was obligated under this Lease to pay prior to the commencement of the renewal term. When fair market rental value is determined, the appropriate Basic Rent shall be calculated retroactive to the commencement of the renewal term and Tenant shall either receive a refund from Landlord (in the case of an overpayment) or shall pay any deficiency to Landlord (in the case of an underpayment). - 37 - EX-10.35 3 LEASE AMENDMENT AGREEMENT DATED 11/15/95 Exhibit 10.35 LEASE AMENDMENT AGREEMENT ------------------------- THIS LEASE AMENDMENT AGREEMENT (this "Agreement") is made this 15th day of November 1995 by and among CORPORATE PROPERTY ASSOCIATES 2 AND CORPORATE PROPERTY ASSOCIATES 3 (collectively "Landlord"), both California limited partnerships with an address c/o W.P. Carey & Co., Inc., 50 Rockefeller Plaza, New York, New York 10020 and GIBSON GREETINGS, INC., formerly known as Gibson Greeting Cards, Inc. ("Gibson"), a Delaware corporation, with an address at 2100 Section Road, Cincinnati, Ohio 45237. W I T N E S S E T H - - - - - - - - - - WHEREAS, Landlord and Gibson entered into a Lease Agreement dated January 25, 1982, as amended by Amendment dated June 25, 1985 and as further amended by an undated Letter Agreement executed by Landlord and Gibson on or about April 25, 1986 (collectively, as so amended, the "Lease"). Pursuant to the Lease, Landlord is currently leasing to Gibson three parcels of Land, together with the Improvements and Equipment erected thereon and pertaining thereto (individually, the "Ohio Premises", the "Tennessee Premises" and the "Kentucky Premises" and collectively, the "Leased Premises"). The Leased Premises are more particularly described in the Lease. WHEREAS, by Sublease of Tennessee Premises dated as of the first day of January, 1989, Gibson subleased to CLEO, Inc., a Tennessee corporation, a subsidiary of Gibson, ("CLEO") the Tennessee Premises (the "Sublease"). Landlord consented to the Sublease by letter to Gibson dated December 30, 1988. WHEREAS, a Memorandum of Lease was filed in Hamilton County, Ohio as to the Ohio Premises, Madison County, Kentucky, as to the Kentucky Premises, and Shelby County, Tennessee as to the Tennessee Premises, with respect to the Lease. WHEREAS, Gibson, with the consent of Landlord, is, contemporaneously with the execution of this Agreement, selling all of the stock of CLEO to CSS Industries, Inc., a Delaware corporation ("CSS") and terminating the Sublease. WHEREAS, CLEO and Landlord, contemporaneously with the execution of this Agreement, will execute a separate Lease Agreement with respect to the Tennessee Premises. WHEREAS, Landlord and Gibson wish to clarify their mutual rights, duties and obligations under the Lease and make various amendments to the Lease all as more particularly set forth herein. NOW, THEREFORE, the parties hereto in consideration of the mutual promises contained herein and intending to be legally bound hereby, covenant and agree as follows: 1. The recitals set forth above, all exhibits attached hereto, if any, and the Lease referred to therein, are incorporated herein by reference and all definitions and document identifications, shall, except as expressly provided to the contrary herein, have the same meanings in this Agreement as are respectively ascribed to them in the Lease as if set forth in full in the body of this Agreement. 2. The Lease is hereby terminated with respect to the Tennessee Premises only. Accordingly, all references in the Lease to the Tennessee Premises are hereby deleted and the term "Leased Premises" shall hereafter mean collectively only the Ohio Premises and the Kentucky Premises. 3. From and after the date hereof Gibson shall be obligated to perform all of the terms, covenants and conditions and shall hold all of the rights, duties, obligations and benefits of the tenant under the Lease (including, without limitation, liability for any Environmental Violation) as the same applies to the Ohio Premises and the Kentucky Premises only, as the same may be amended by this Agreement. 4. Gibson shall remain liable to Landlord for the performance of all of tenant's liabilities, duties, obligations, covenants and agreements under the Lease (including, without limitation, liability for any Environmental Violation) as they pertain to the Tennessee Premises (a) which arose on or prior to the date hereof or (b) which arise on or after the date hereof due to acts or omissions of Gibson - 1 - and/or conditions existing at the Tennessee Premises prior to the date hereof. The foregoing agreement shall remain in full force and effect in favor of Landlord, notwithstanding any agreement between Gibson and CLEO and/or CSS with respect to assumption of liabilities under the Lease. 5. Landlord hereby agrees to enter into a direct Lease Agreement with CLEO contemporaneously with the execution of this Agreement. Landlord hereby acknowledges that (a) Basic Rent under the Lease has been paid through October 31, 1995; (b) to the knowledge of Landlord without independent investigation, no Event of Default exists under the Lease with respect to the Tennessee Premises; and (C) to the knowledge of Landlord without independent investigation, no condition exists which with the giving of notice or the passage of time or both would constitute an Event of Default under the Lease with respect to the Tennessee Premises except that the roof is in disrepair and needs to be repaired or replaced; provided, however, that Landlord shall take no action against Gibson with reference to the condition of the roof until after May 15, 1996. 6. (a) Gibson shall pay to Landlord, within two (2) business days following the execution and delivery of this Agreement, the sum of Twelve Million Two Hundred Thousand Dollars ($12,200,000) (the "Consideration"). The Consideration is a one-time lump sum payment as consideration for Landlord terminating the Lease as to the Tennessee Premises. Such payment shall not reduce or be credited toward the Basic Rent, Additional Rent or any other amount owed to Landlord by Gibson under the Lease or otherwise. 7. (b) As directed by Landlord, Gibson shall wire the Consideration directly to Principal Mutual Life Insurance Company ("Lender") to be applied toward the payoff of the loan secured by a mortgage encumbering the Leased Premises (the "Loan"). Landlord covenants that Landlord will initiate a wire for the balance of funds necessary to fully pay off the Loan, including any prepayment penalty, contemporaneously with confirmation of receipt of the wire of the Consideration from Gibson to Lender. 8. Paragraph 5(a) of the Lease shall be amended to extend the Term of the Lease through November 30, 2013. The options to extend the Lease granted to Gibson in Paragraph 5(b) of the Lease are hereby terminated. Paragraph 5(b) of the Lease is deleted in its entirety and replaced by the following: "(b) Landlord hereby grants to Tenant the right at Tenant's option to extend the Term of this Lease for one additional period of ten (10) years after the expiration of the initial Term hereof (the "Renewal Term"). The Renewal Term shall be subject to all of the terms and conditions of this Lease as if the Term originally included such Renewal Term and upon the exercise of such option, the Term shall include such Renewal Term therein. Tenant may exercise its option to extend the Term only by giving written notice of such extension to Landlord no later than twelve (12) months, and no earlier than 18 months, prior to the expiration of the initial Term." All other provisions of Paragraph 5 of the Lease remain unchanged and in full force and effect. In consideration of the extension of the Term of the Lease as provided in Paragraph 7 above, Exhibit F of the Lease is deleted in its entirety and Paragraph 6 of the Lease is amended to change Basic Rent as follows: Beginning November 15, 1995, the Basic Rent shall be Three Million One Hundred Thousand ($3,100,000) Dollars per annum, payable monthly, in arrears, as more particularly set forth in Paragraph 6 of the Lease. Every five (5) years, annual Basic Rent shall increase twenty percent (20%) over the then current Basic Rent as follows: For the period December, 2000 through November, 2005, inclusive, Basic Rent shall be Three Million Seven Hundred Twenty Thousand ($3,720,000) Dollars per annum; for the period December, 2005 through November, 2010, inclusive, Basic Rent shall be Four Million Four Hundred Sixty-Four Thousand ($4,464,000) Dollars per annum; for the period December, 2010 through November, 2013, inclusive, Basic Rent shall be Five Million Three Hundred Fifty-Six Thousand Eight Hundred ($5,356,800) Dollars per annum. Basic Rent for the Ohio Premises, the Kentucky Premises and the Tennessee Premises for the fourteen (14) days from November 1 through November 14, 1995, computed using the annual Basic Rent under the Lease in effect just prior to this Agreement, shall be paid by Gibson on December 1, 1995. Basic Rent, computed using the annual Basic Rent set forth above in this Paragraph 8, - 2 - for the Ohio Premises and the Kentucky Premises for the sixteen (16) days from November 15 through November 30, 1995 shall be paid by Gibson on December 1, 1995. If Gibson exercises its option to extend the Lease pursuant to Paragraph 5(b) of the Lease as amended herein, the annual Basic Rent for the Renewal Term shall be the lower of: (a) Six Million Four Hundred Twenty Eight Thousand One Hundred Sixty ($6,428,160) Dollars; and (b) the fair market rental value of the Leased Premises. The fair market rental value of the Leased Premises shall be determined as follows: Landlord and Tenant shall endeavor to agree on fair market rental value at least nine (9) months prior to the expiration of the then current lease Term. If Landlord and Tenant are unable to reach agreement on the fair market rental value of the Leased Premises within said time period, the procedure set forth in Paragraph 27 of the Lease for determining the fair market value of the Leased Premises shall be followed except that the appraisers shall be instructed to determine fair market rental value, and not fair market value. In determining fair market rental value, the appraisers shall determine the amount that a willing tenant would pay, and a willing landlord of a comparable property located in a radius of 10 miles of the Leased Premises would accept, at arm's length, to rent a property of comparable size and quality as the Leased Premises taking into account: (a) the age, quality, and condition of the Improvements; (b) that the Leased Premises will be leased as a whole or substantially as a whole to a single user; (C) a lease term of ten (10) years; (d) an absolute triple net lease; and (e) such other items that professional real estate appraisers customarily consider. The fair market rental value shall be determined separately for each property comprising the Leased Premises. If, by virtue of any delay, fair market rental value is not determined by the expiration or termination of the then current Term, then until fair market rental value is determined, Tenant shall continue to pay Basic Rent during the Renewal Term in the same amount which it was obligated under this Lease to pay prior to the commencement of the Renewal Term. When fair market rental value is determined, the appropriate Basic Rent shall be calculated retroactive to the commencement of the Renewal Term and Tenant shall either receive a refund from Landlord (in the case of an overpayment) or shall pay any deficiency to Landlord (in the case of an underpayment)." All other provisions of Paragraph 6 remain unchanged and in full force and effect. 9. In consideration of the extension of the Term of the Lease as provided in Paragraph 7 above, Paragraph 27 of the Lease shall be amended as follows: The options to purchase the Leased Premises granted to Gibson on the last day of the tenth (10th) year of the Term and on the last day of the twentieth (20th) year of the Term are hereby terminated. Landlord hereby grants Gibson the option to purchase the Ohio Premises, the Kentucky Premises or both on the last day of November, 2005 and, if Gibson does not exercise this option, Landlord hereby grants Gibson a second option to purchase the Ohio Premises, the Kentucky Premises or both on the last day of November, 2010, and if Gibson does not exercise this option and has extended the Lease pursuant to Paragraph 5(b) as amended herein, Landlord grants Gibson a third option to purchase the Ohio Premises, the Kentucky Premises or both on the last day of November, 2023. Accordingly, all references in Paragraph 27 of the Lease to "the last day of the tenth (10th) year of the Term" shall be deleted and replaced by "the last day of November, 2005," all references in Paragraph 27 of the Lease to "the last day of the twentieth (20th) year of the Term" shall be deleted and replaced by "the last day of November, 2010" and a reference to the third option granted herein on the last day of November, 2023 shall be added. The options to purchase granted to Gibson hereunder may only be exercised if no Event of Default has occurred which has not been cured both at the time of the exercise of the option and at the time of title closing on such purchase. If Tenant exercises its option to purchase the Ohio Premises, the Kentucky Premises or both, the purchase price shall be the fair market value of such premises at the time of the exercise of the option determined in accordance with the provisions of Paragraph 27 of the Lease (the fair market value of both premises comprising the Leased Premises shall be determined, even if Tenant desires to buy only one such premises, if on the purchase date the Basic Rent will not be determined by reference to the fair market rental value of the Leased Premises). If Gibson exercises its option to purchase either the Ohio Premises or the Kentucky Premises but not both, the Lease will continue with respect to the premises not being purchased, if the Term of the Lease has not terminated by the date of title closing on the purchase, and the Basic Rent for such remaining premises shall be either (a) the fair market rental value of such remaining premises, if Basic Rent is then being determined by reference to the fair market rental value of each - 3 - premises comprising the Leased Premises determined in accordance with the provisions of Paragraph 6 of the Lease as amended in Paragraph 8 hereof, or (b) if the Basic Rent is not then being determined by reference to fair market rental value, the new Basic Rent shall be the product obtained by multiplying Basic Rent then in effect by a fraction, the numerator of which is the fair market value of the premises not being purchased and the denominator of which is the fair market value of both properties comprising the Leased Premises. All other provisions of Paragraph 27 remain unchanged and in full force and effect. 10. The following definitions shall be added to Paragraph 2 of the Lease: 11. (a) "Environmental Law" shall mean whenever enacted or promulgated any applicable federal, state, foreign and local law, statute, ordinance, rule, regulation, or code relating to pollution or protection of the environment or to health and safety, including, without limitation, laws relating to (i) emissions, discharge, releases or threatened releases of Hazardous Substances into the environment (including ambient air, surface water, groundwater, or land) and (ii) the processing, use, generation, treatment, storage, disposal, recycling, or remediation of Hazardous Substances or Hazardous Conditions. 12. (b) "Environmental Violation" shall mean (a) any direct or indirect discharge, disposal, spillage, emission, escape, pumping, pouring, injection, leaching, release, seepage, filtration or transporting of any Hazardous Substance at, upon, under, onto or within the Leased Premises, or from the Leased Premises to the environment, in violation of any Environmental Law or in excess of any reportable quantity established under any Environmental Law or which could result in any liability to Landlord, Tenant or First Lender, any Federal, state or local government or any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (b) any deposit, storage, dumping, placement or use of any Hazardous Substance at, upon, under or within the Leased Premises or which extends to any Adjoining Property in violation of any Environmental Law or in excess of any reportable quantity established under any Environmental Law or which could result in any liability to any Federal, state or local government or to any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (C) the abandonment or discarding of any barrels, containers or other receptacles containing any Hazardous Substances in violation of any Environmental Laws, (d) any Hazardous Condition which results in any liability, cost or expense to Landlord or First Lender or any other owner or occupier of the Leased Premises, or which could result in a creation of a lien on the Leased Premises under any Environmental Law, or (e) any material violation of or noncompliance with any Environmental Law; provided, however, Environmental Violation shall not include any matter described in the foregoing clauses (a) through (e) of this definition that (i) arises out of or relates to a condition existing at the Leased Premises on the date of this Lease, (ii) arises or results from the migration of any Hazardous Substance onto the Leased Premises from any other property, or (iii) arises or accrues due to acts or omissions occurring prior to the date of this Lease. 13. (C) "Hazardous Conditions" shall mean conditions of the environment, including soil, surface water, groundwater, subsurface strata or the ambient air, relating to or arising out of the use, handling, storage, treatment, recycling, generation, release, disposal, or threatened release of Hazardous Substances. 14. (d) "Hazardous Substances" shall mean any pollutant, contaminant, hazardous or toxic substance, hazardous waste, or other chemicals, substances or materials subject to regulation under any Environmental Law. 15. (e) "Renewal Term" shall have the meaning set forth in Paragraph 5(b) of the Lease as amended in Paragraph 7 of this Agreement. 16. The effectiveness of this Agreement, the Lease Agreement with CLEO and the transactions contemplated by those documents is specifically conditioned and contingent upon: (a) Landlord and CLEO entering into a Lease Agreement for the Tennessee Premises in form and substance acceptable to Landlord; (b) CSS executing a Guaranty and Suretyship Agreement in favor of Landlord, guarantying CLEO's obligations under the lease with Landlord, in form and substance acceptable to Landlord; and (C) receipt of the Consideration by Lender within two (2) business days of the execution of this Agreement. Except as expressly amended hereby, the Lease remains in full force and effect in accordance with its terms. - 4 - IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first above written. Signed and acknowledged in the presence of: CORPORATE PROPERTY ASSOCIATES 2 By: W.P. Carey & Co., Inc., General Partner __________________________ By:______________________ Name: Title: __________________________ Name: CORPORATE PROPERTY ASSOCIATES 3 By: W.P. Carey & Co., Inc., General Partner __________________________ By: ____________________ Name: Title: __________________________ Name: GIBSON GREETINGS, INC. __________________________ By:___________________________ Name: William L. Flaherty Vice President and Chief Executive Officer __________________________ Name: - 5 - COMMONWEALTH OF PENNSYLVANIA : : ss. COUNTY OF : On this, the ____ day of November, 1995, before me, a notary public, the undersigned officer, personally appeared __________________, who acknowledged himself to be the ____________ of W.P. Carey & Co., Inc., a ______________ corporation, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal the day and year aforesaid. Notary Public My Commission Expires: - 6 - COMMONWEALTH OF PENNSYLVANIA : : ss. COUNTY OF : On this, the _____ day of November, 1995, before me, a notary public, the undersigned officer, personally appeared William L. Flaherty, who acknowledged himself to be the Vice President and Chief Financial Officer of Gibson Greetings Inc., a Delaware corporation, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal the day and year aforesaid. Notary Public My Commission Expires: - 7 - EX-27 4 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 577506 0 370861 22660 0 1008569 37466073 5351359 33123283 774579 7262720 0 0 0 25085984 33123283 0 5185804 0 0 1237926 0 1351797 2570120 0 2570120 0 0 0 2570120 46.75 46.75
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