-----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, JJMFo6b2h6oPInZgQR/33R90JIdCRDlKPUKjzAXx4sU1nIO3bbLNRndQ2xnjU2+T 8s2ju7g2Dw7hd+Jn5xL1gw== 0000950130-97-001532.txt : 19970404 0000950130-97-001532.hdr.sgml : 19970404 ACCESSION NUMBER: 0000950130-97-001532 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970403 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: 97574278 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA 2ND FL CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA 2ND FL CITY: NEW YORK STATE: NY ZIP: 10020 10-K405 1 FORM 10-K 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, 1996 ------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ---------------------- ----------------------- Commission file number 0-9727 ---------------------------------------------------------- CORPORATE PROPERTY ASSOCIATES 2 - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 13-3022196 - ------------------------------------------------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 - ------------------------------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 492-1100 ---------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE - ------------------------------- ------------------------------------------ Securities registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP UNITS - -------------------------------------------------------------------------------- (Title of Class) - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((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, 1996, revenues from properties occupied by tenants which accounted for 10% or more of operating revenue were as follows: Unisource Worldwide, Inc. ("Unisource"), 29%; Pre Finish, Metals, Inc. ("Pre Finish"), 21%; Gibson Greetings, Inc., 18%; and Cleo, Inc., 10%. No other property owned by Registrant accounted for 10% or more of its total operating revenues during 1996. See Note 9 to the Financial Statements in Item 8. Unisource and Materials Sciences Corporation ("MSC") guarantor of Pre Finish's lease obligations are publicly traded companies. For the fiscal year ended September 30, 1996, Unisource's audited financial statement reported revenues of $7,022,808,000, net income of $59,998,000, total assets of $2,191,714,000 and shareholders' equity of $935,501,000. MSC's audited financial statements for the year ended February 28,1996 reported net sales of $236,150,000, net income of $11,979,000, total assets of $202,115,000 and shareholders' equity of $121,708,000. All of Registrant's real estate properties are leased to corporate tenants under net leases. A net lease generally requires tenants to pay all operating expenses relating to the leased properties including maintenance, real estate taxes, insurance and utilities which under other forms of leases are often paid by the lessor. Lessees are required to include Registrant as an additional insured party on all insurance policies relating to the leased properties. In addition, substantially all of the net leases include indemnification provisions which require the lessees to indemnify Registrant and the General 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 - 1 - and liability for its property in Maumelle, Arkansas which is reimbursed by tenants. To the extent that any lessees are not financially able to satisfy indemnification obligations which exceed insurance reimbursements, Registrant may incur the costs necessary to repair properties and settle liabilities. As described above, lessees retain the obligation for the operating expenses of their leased properties so that, other than rental income, there are no significant operating data (i.e. expenses) reportable on Registrant's leased properties. As discussed in Registrant's Management's Discussion and Analysis in Item 7, Registrant's leases generally provide for periodic rent increases which are either stated and negotiated at the inception of the lease or based on formulas indexed to increases in the Consumer Price Index. Registrant's leases have initial lease terms which generally end between 2001 and 2013 with such leases providing for multiple renewal terms of generally five or ten years. Registrant's leases with Pre Finish, Unisource, Gibson and Cleo 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 which are not scheduled to expire until after the year 2000. In April 1996, B&G Contract Packaging, Inc. ("B&G") net leased 50% of the available space at Registrant's distribution property in Maumelle through December 31, 1997 with two two-year renewal terms at B&G's option. Due to the short-term nature of the leases at this property, Registrant's rents are based on the competitive rates for this property. In June 1996, Registrant paid off an existing mortgage loan of $5,539,072 collateralized by Registrant's property leased to Unisource and obtained new mortgage financing for the property. The new loan of $7,000,000 provides for quarterly installments of principal and interest of $202,000 at annual interest rate of 7.24% and fully amortizes in February 2010. In August 1996, Registrant entered into a lease agreement for its Reno, Nevada property with a wholly-owned subsidiary of Excel Telecommunications, Inc ("Excel"), with such lease obligations unconditionally guaranteed by Excel. The initial lease term commenced in December 1996 with Registrant's share of annual rents of approximately $209,000. The lease provides Excel the right to terminate the lease at the end of the sixth lease year. 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. - 2 - 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 EXCEL TELE- Land and Reno, Ownership of an COMMUNICATIONS, Building Nevada approximate 39% INC. interest in land and buildings PRE FINISH METALS Land and Warehouse/ Walbridge, Ohio Ownership of a 40% INCORPORATED Manufacturing Plant interest in land and building (1) MAYBELLINE Land and Warehouse/ Maumelle, Ownership of land PRODUCTS CO., INC. Distribution Center Arkansas and building AND B&G CONTRACT PACKAGING, INC. WEXLER AND WEXLER Land and Retail New Orleans, Ownership of land Stores LA and building A. JONES 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. - 4 - The material terms of Registrant's leases with its significant tenants are summarized in the following table:
Registrant's Share Current Lease Lease of Current Square Rent Per Expiration Renewal Ownership Obligor Annual Rents Footage Sq.Ft.(1) (Mo./Year) Terms Interest - ----------- ------------ --------- ---------- ----------- ------- ----------------- Gibson $ 733,429 1,194,840 2.59 04/2010 YES 28.5% interest as Greetings, tenant-in-common; Inc. remaining interest owned by Corporate Property Associates 3 ("CPA(R):3") Cleo, Inc. 345,600 1,006,566 1.49 12/2005 YES 28.5% interest as tenant-in-common; remaining interest owed by CPA(R):3 Unisource 1,292,800 411,579 3.14 04/2010 YES 100% Worldwide, Inc. New Valley 240,684 78,080 7.86 11/2001 YES 39% interest; 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; Corporation as tenant-in-common, remaining interest owned by CPA(R):3 Pre Finish 967,599 (3) 313,704 7.72 06/2003 YES 40% INTEREST; Metals as tenant-in-common, Incorporated remaining interest owned by Corporate Property Associates Sports & 121,000 74,066 4.17 05/2012 YES 39% interest; Recreation, as tenant-in-common Inc. interest owed by CPA(R):3 Excel Tele- 208,966 53,158 10.02 12/2002 YES 39% INTEREST; commun- as tenant-in-common, ications, Inc. remaining interest owned by CPA(R):3 Terms of Lease Purchase Gross Obligor Option Costs (2) - ----------- ------------ ------------ Gibson Fair market value as $ 3,799,587 Greetings, encumbered by the lease. Inc. Cleo, Inc. The greater of fair 3,242,269 market value or $4,275,000. Fair market value is capped at $4,631,250. Unisource The greater of 11,572,179 Worldwide, fair market Inc. value of the property or $10,744,680. New Valley N/A 2,310,649 Corporation AT&T N/A 2,909,846 Corporation Pre Finish The greater of 6,875,982 Metals fair market Incorporated value of the property or $5,248,817 plus 2 1/2% thereof per annum, not compounded, from 12/9/80 to the closing date. Sports & N/A 1,160,000 Recreation, Inc. Excel Tele- N/A 1,490,808 commun- ications, Inc.
(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 $329,422 plus variable debt rent. - 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 12/31/96 Service Date Due at Maturity Prepayment Provisions - ----------------- --------------- -------- ----------- --------- ----------------- --------------------- Unisource Worldwide, Inc. 7.24 $6,847,993 $808,088 2/1/2010 (3) NO PREMIUM FOR PREPAYMENT IN FULL OR IN PART (MINIMUM OF $100,000). Pre Finish Metals Incorporated 9.00 (1) 939,068 636,851 (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 1997. 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, 1996 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 22 of Registrant's Annual Report contained in Appendix A. Item 6. Selected Financial Data. ------------------------ Selected Financial Data are hereby incorporated by reference to page 2 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 3 to 5 of Registrant's Annual Report contained in Appendix A. Item 8. Consolidated Financial Statements and Supplementary Data. --------------------------------------------------------- The following financial statements and supplementary data are hereby incorporated by reference to pages 6 to 17 of Registrant's Annual Report contained in Appendix A. (i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 1995 and 1996. (iii) Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996. (iv) Consolidated Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (vi) Notes to Consolidated Financial Statements. 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 66 Chairman of the Board 8/79 Director Francis J. Carey 71 President 8/79 Director George E. Stoddard 80 Chairman of the Investment Committee 8/79 Director Madelon DeVoe Talley 65 Vice Chairman of the Board 4/86 Director Lawrence R. Klein 76 Chairman of the Economic Policy 4/84 Committee Director Barclay G. Jones III 36 Executive Vice President 8/82 Director Claude Fernandez 44 Executive Vice President 3/83 Chief Administrative Officer H. Augustus Carey 39 Senior Vice President 8/88 Anthony S. Mohl 34 Senior Vice President 9/87 John J. Park 32 Senior Vice President 7/91 Treasurer Michael D. Roberts 45 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. H. Augustus Carey is the nephew of William Polk Carey 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 and Commerce, Mr. Carey is a Governor of the National Association of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University, The James A. Baker III Institute for Public Policy at Rice University, Templeton College of Oxford University and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that University. Mr. Carey is also a Director of CPA(R):10, CIP(TM) and CPA(R):12. 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. Prior to joining the firm full-time, he was a senior partner in Philadelphia, head of the Real Estate Department nationally and a member of the executive committee of the Pittsburgh based firm of Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships, W.P. Carey and some of its affiliates. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990. He has also served as a member of the Board of Trustees of the Investment Program Association since 1990 and on the Business Advisory Council of the Business Council for the United Nations since 1994. He holds A.B. and J.D. degrees from the University of Pennsylvania. Mr. Carey is also a Director of CPA(R):10 and CIP(TM). 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. 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 a Trustee of the 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. Mrs. Talley was also a former Governor of the N.A.S.D. and 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 and Public Affairs at Columbia University. 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. Barclay G. Jones III, Executive Vice President, Managing Director, and head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York. - 9 - 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. H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988 and is President of W.P. Carey's broker-dealer subsidiary. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council. Anthony S. Mohl, Senior Vice President and Director of Portfolio Management, joined W.P. Carey & Co., in 1987 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. John J. Park, Senior Vice President, Treasurer and Director of Research, 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 for over 8 years, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. in sociology 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 $13,322 and $1,480, respectively, from Registrant as their share of Distributable Cash From Operations during the year ended December 31, 1996. As owner of 200 Limited Partnership Units, the Corporate General Partner received cash distributions of $5,336 during the year ended December 31, 1996. See Item 7 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, 1996. 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, 1996, 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 15, 1997 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 Madelon DeVoe Talley Barclay G. Jones III Lawrence R. Klein Claude Fernandez H. Augustus Carey 20 .04 Anthony S. Mohl John J. Park Michael D. Roberts --- ---- All executive officers and directors as a group (11 persons) 230 units .42% === ====
(1) As of March 15, 1997, 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, Senior Vice President and Secretary of the Corporate General Partner and certain of its affiliates, is a partner of Reed Smith Shaw & McClay which is engaged to perform legal services for Registrant. 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. Consolidated Financial Statements: ---------------------------------- The following consolidated financial statements are filed as a part of this Report: Report of Independent Accountants. Consolidated Balance Sheets, December 31, 1995 and 1996. Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996. Consolidated Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. Notes to Consolidated Financial Statements. The financial statements are hereby incorporated by reference to pages 6 to 17 of Registrant's Annual Report contained in Appendix A. (a) 2. Financial Statement Schedule: ----------------------------- The following schedule is filed as a part of this Report: Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996. Notes to Schedule III. Schedule III and notes thereto are hereby incorporated by reference to pages 18 to 19 of Registrant's Annual Report contained in Appendix A. Financial Statement Schedules other than those listed above are omitted because the required information is given in the Consolidated Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist. - 12 - (a) 3. Exhibits: --------- The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit Method of No. Description Filing - ------- ----------- ----------------------- 3.1 Amended Agreement of Limited Partnership of Exhibit 3(B) to Regis- Registrant dated as of November 1, 1979. tration Statement (Form S-11) No. 2-65357 3.2 Amendment No. 1 dated April 29, 1980 to Exhibit 12 to Form 8-K Amended Agreement of Limited Partnership filed May 12, 1980 of Registrant. 4.36 $11,000,000 Note dated May 30, 1986 Exhibit 4.2 to Form 8-K from Creditanstalt-Bankverein dated July 14, 1986 ("Creditanstalt"), as Lender, to the Registrant and CPA(R):1, as Borrower. 4.37 Note Purchase Agreement dated as of Exhibit 4.3 to Form 8-K May 30, 1986 between Material dated July 14, 1986 Sciences Corporation ("MSC"), as Purchaser, and Creditanstalt, as Lender. 4.38 Letter dated June 27, 1986 from Exhibit 4.4 to Form 8-K Registrant and CPA(R):1 to Pre Finish dated July 14, 1986 Metals Incorporated ("PFM") and MSC regarding Note Purchase Agreement. 4.39 Mortgage and Security Agreement Exhibit 4.5 to Form 8-K dated as of May 30, 1986 between dated July 14, 1986 Registrant and CPA(R):1, as Mortgagor, and Creditanstalt, as Mortgagee and Secured Party. 4.40 Assignment of Agreements dated as of Exhibit 4.6 to Form 8-K May 30, 1986 from the Registrant and dated July 14, 1986 CPA(R):1, as Assignors, to Creditanstalt, as Assignee. 4.41 Assignment of Sublease dated as of Exhibit 4.7 to Form 8-K May 30, 1986 from PFM, as Assignor, dated July 14, 1986 to the Registrant and CPA(R):1, as Assignees. 4.42 Letter Agreement dated June 26, 1986 Exhibit 4.8 to Form 8-K among Creditanstalt, as Lender, and dated July 14, 1986 MSC and PFM. 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
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Exhibit Method of No. Description Filing - ------- ----------- --------------------------- 10.1 Management Agreement between Registrant Exhibit 12(c) to and Carey Corporate Property Management, Registration Statement Inc. (Form S-11) No. 2-65357 10.2 Amendment No. 1 dated April 29, 1980 to Exhibit 13 to Form 8-K Management Agreement between Registrant dated May 12, 1980 and Carey Corporate Property Management, Inc. 10.3 Support Agreement among Registrant, Second Exhibit 12(D) to Regis- Carey Corporate Property, Inc. and W. P. tration Statement (Form Carey & Co., Inc. S-11) No. 2-65357 10.5 Straw Party Agreement by and among Line 6 Exhibit 10.8 to Form 10-K Corp., Registrant and Corporate Property dated March 31, 1982 Associates dated December 11, 1980. 10.6 Lease and Agreement between Line 6 Corp. Exhibit 10.9 to Form 10-K and Pre Finish Metals Incorporated dated March 31, 1982 dated as of December 1, 1980. 10.7 Lease Agreement dated January 25, 1982 Exhibit 1 to Form 8-K between Registrant and CPA(R):3, as 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
- 15 -
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 Exhibit 10.34 to Form 10-K by and between Registrant and CPA(R):3, as dated April 8, 1996 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 Exhibit 10.35 to Form 10-K by and between Registrant and CPA(R):3, as dated April 8, 1996 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, 1996. - 17 - 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. 4/3/97 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 George E. Stoddard Committee and Director Attorney in fact April 3, 1997 Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director Madelon DeVoe Talley Vice Chairman of the Board of 4/3/97 BY: /s/ Claude Fernandez -------------- ----------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer) 4/3/97 BY: /s/ Michael D. Roberts -------------- ------------------------------ Date Michael D. Roberts First Vice President and Controller (Principal Accounting Officer) - 18 - APPENDIX A TO FORM 10-K CORPORATE PROPERTY ASSOCIATES 2 (A CALIFORNIA LIMITED PARTNERSHIP) AND SUBSIDIARIES 1996 ANNUAL REPORT SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- (In thousands except per unit amounts)
1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- OPERATING DATA: Revenues $9,764 $ 6,666 $5,161 $5,186 $4,591 Income before extraordinary item (1) 4,967 10,711 1,732 2,596 2,625 Income before extraordinary item allocated: To General Partners 50 107 17 26 26 To Limited Partners 4,917 10,604 1,715 2,570 2,599 Per unit 89.40 192.80 31.18 46.75 47.33 Distributions attributable (2)(3): To General Partners 39 21 15 15 14 To Limited Partners 3,873 16,352 1,447 1,495 2,256 Per unit 70.42 297.31 26.31 27.19 41.11 Payment of mortgage principal (4) 1,985 1,675 1,617 1,490 937 BALANCE SHEET DATA: Total assets 63,247 41,736 40,571 33,123 33,683 Long-term obligations (5) 28,861 15,758 13,973 939 6,891
(1) Income in 1993 includes a $7,857,000 gain on sale of properties and an extraordinary loss on extinguishment of nonrecourse debt of the disposed properties of $521,000. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (3) Distributions include special distributions of $260 and $15 per Limited Partnership Unit in 1993 and 1996, respectively. (4) Represents scheduled mortgage principal amortization paid. (5) Represents mortgage obligations due after more than one year. - 1 - MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Results of Operations --------------------- Net income for the year ended December 31, 1996 increased by $29,000 as compared with net income for the prior year. The results for 1995 include $123,000 from nonrecurring items included as other income in the accompanying financial statements. The increase in income was due to the decrease in interest expense and was partially offset by decreases in lease revenues and interest income and by an increase in property expense. The decrease in interest expense was due to the payoff of the debt collateralized by the Gibson Greetings, Inc. ("Gibson") properties in connection with the restructuring of the Gibson lease and the benefit from the refinancing, in June 1996, of the mortgage loan on the Partnership's property leased to Unisource Worldwide, Inc. ("Unisource") at a lower rate of interest. Solely as a result of the Unisource mortgage refinancing, annual debt service will decrease by $305,000. The decrease in lease revenues was due to the Gibson restructuring which included the severing of a property from the Gibson master lease, restating the Gibson lease and entering into a lease agreement for the severed property with Cleo, Inc. ("Cleo"). As more fully described below, the Partnership received substantial consideration in 1995 for agreeing to the restructuring. Although the combined rent from the Cleo and Gibson properties decreased as compared with rents prior to the restructuring, net cash flow from the Gibson and Cleo properties has remained stable due to the retirement of the mortgage debt on such properties. The decrease in lease revenues was partially offset by new leases for the Moorestown, New Jersey property with Sports & Recreation, Inc. ("Sports & Recreation") and a new lease with B&G Contract Packaging, Inc. for 50% of the leasable space at the Partnership's distribution facility in Maumelle, Arkansas. The increase in property expense was attributable to legal costs incurred in connection with the Partnership's pursuing its bankruptcy claim against New Valley Corporation ("New Valley") relating to New Valley's termination of leases in 1993 and 1994. The amount of any settlement with New Valley cannot be determined at this time. Net income for the year ended December 31, 1995 increased by $864,000 as compared with net income for 1994. Of such increase, $123,000 was due to nonrecurring items. 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 in the first quarter of 1995 and the prepayment of the mortgage loan on the Gibson properties in November 1995 in connection with the restructuring. 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 in November 1995, and the termination of the New Valley lease in Reno, Nevada in December 1994. The Gibson and New Valley revenue 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"). A-Pak subsequently vacated the property; however, a new lessee took occupancy of the vacated space in 1996. 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 and which included the Partnership's consenting to sever a property from the lease to enable Gibson to sell its Cleo subsidiary to CSS Industries, Inc. Interest expense is expected to decrease as a result of the refinancing of the Unisource property mortgage loan in June 1996 and the scheduled maturity of the mortgage loan on the Pre Finish Metals, Inc. ("Pre Finish") property in June 1998. Lease revenues will benefit from a full year's revenues from the Partnership's new lease with Excel Telecommunications, Inc. ("Excel") which will provide annual rents of $208,000 and scheduled increases in May 1996 on the leases with New Valley and AT&T Corporation which will increase annual cash flow by $36,000. In addition, with the commencement of the Excel lease at the Reno, Nevada property in December 1996, the Partnership has been relieved of the carrying costs for maintenance, insurance and real estate taxes related to that property. In December 1996, Maybelline extended its lease for 50% of the leasable space at the Maumelle facility. Under the two-year extension agreement, effective - 2 - January 1997, Maybelline has the option to terminate the lease at any time with three months' notice. The Maybelline lease provides for annual rent of $156,000. Although Sports & Recreation continues to meet its rental obligation, it has decided not to occupy the property. Sports & Recreation may seek to terminate its lease on the Moorestown property; however, the Partnership will only agree to such termination in exchange for substantial consideration. 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. Although there are indications that there may be legislation which changes the method of calculating the CPI, the Partnership cannot predict the outcome of any proposed changes relating to the CPI. Financial Condition ------------------- 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 relatively stable cash flow from its net leases to meet operating expenses, and fund quarterly distributions to partners. The Partnership's cash balances increased by $489,000 to $1,067,000. Cash provided from operations of $2,792,000 was sufficient to pay quarterly distributions to partners of $1,480,000 and scheduled principal payment installments of $937,000. Although cash provided from operations reflected a decrease from the prior year, cash provided from operations for the year ended December 31, 1995 included a one-time benefit of $3,238,000 received in connection with the Gibson restructuring. The Partnership's investing activities during 1996 consisted primarily of funding improvements at the Reno property in connection with its obligation under the Excel lease. The Partnership will fund up to $416,000 of improvements in 1997 at the Reno property under the tenant improvement obligation even though Excel has already taken occupancy of the property. The Partnership expects to fund this remaining commitment from its cash flow or by utilizing a portion of its current cash reserves. The Partnership's financing activities in 1996 included quarterly distributions to partners of $1,480,000, a special distribution of $824,000 and payments of scheduled mortgage principal installments of $937,000. In addition, the Partnership borrowed $7,000,000 in connection with refinancing the mortgage loan on the Unisource property at which time it paid off an existing loan of $5,539,000. The excess proceeds from the refinancing were used to pay off a $1,250,000 note obligation to an affiliate and the aforementioned special distribution. As noted, solely as a result of the refinancing, annual debt service has decreased by $305,000. The Partnership currently has two mortgage loans outstanding; the Unisource loan which will fully amortize in 2010 and the Pre Finish loan which will fully amortize in 1998. As a substantial number of the Partnership's properties are unleveraged, the Partnership has significant borrowing capacity. The Partnership's projected cash flows from operations are expected to be sufficient for it to meet distribution objectives and debt service requirements and the Partnership has no current plans to use its borrowing capacity. Pre Finish has an option to purchase its leased property between June 1998 and 2003. The option is exercisable at the greater of fair market value or $5,249,000 plus 2 1/2% per annum from December 1980 to the closing date. The mortgage loan on the Pre Finish property will fully amortize by June 30, 1998, therefore, the Partnership would not need to use any sales proceeds to pay off any mortgage debt in the event the option is exercised. Annual cash flow (rentals less debt service on the mortgage loan) from the Pre Finish property is currently $331,000. In addition, Cleo's option to purchase its property is exercisable at any time - 3 - with at least six months' notice. The Partnership's share of the sales proceeds in the event the option is exercised would range between $4,275,000 and $4,631,000. Annual cash flow from the Cleo property is $355,000. All of the Partnership's properties are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. All of the Partnership's properties are currently leased to corporate tenants. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership against all liabilities and losses related to their operations at the leased properties. If the Partnership undertakes to clean up or remediate any of its properties, the General 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 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. The General Partners are continuing to investigate ways to provide liquidity for limited partners on a tax-effective basis. - 4 - REPORT of INDEPENDENT ACCOUNTANTS To the Partners of Corporate Property Associates 2 and Subsidiaries: We have audited the accompanying consolidated balance sheets of Corporate Property Associates 2 (a California limited partnership) and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule included on pages 17 to 19 of this Annual Report. These financial statements and financial statement schedule are the responsibility of the General Partners. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporate Property Associates 2 (a California limited partnership) and Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the financial information required to be included therein pursuant to Securities and Exchange Commission Regulation S-X Rule 12-28. /s/ Coopers & Lybrand L.L.P. New York, New York March 17, 1997 - 5 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1996
1995 1996 ----------- ----------- ASSETS: Real estate leased to others: Accounted for under the operating method: Land $ 4,850,433 $ 4,850,433 Buildings 12,555,513 12,756,321 ----------- ----------- 17,405,946 17,606,754 Accumulated depreciation 5,351,359 5,850,679 ----------- ----------- 12,054,587 11,756,075 Net investment in direct financing leases 20,060,127 20,259,530 ----------- ----------- Real estate leased to others 32,114,714 32,015,605 Cash and cash equivalents 577,506 1,066,861 Accrued interest and rents receivable, net of reserve for uncollected rents of $22,660 in 1995 348,201 360,786 Other assets, net of accumulated amortization of $83,725 in 1995 and $3,571 in 1996 82,862 239,271 ----------- ----------- Total assets $33,123,283 $33,682,523 =========== =========== LIABILITIES: Mortgage notes payable $ 7,262,720 $ 7,787,061 Note payable to affiliate 250,000 Accrued interest payable 109,632 75,233 Accounts payable and accrued expenses 74,884 66,050 Accounts payable to affiliates 57,263 63,447 Security deposits 282,800 283,694 ----------- ----------- Total liabilities 8,037,299 8,275,485 ----------- ----------- Commitments and contingencies PARTNERS' CAPITAL: General Partners 196,888 208,334 Limited Partners (54,900 Limited Partnership Units issued and outstanding at December 31, 1995 and 1996) 24,889,096 25,198,704 ----------- ----------- Total partners' capital 25,085,984 25,407,038 ----------- ----------- Total liabilities and partners' capital $33,123,283 $33,682,523 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. - 6 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of INCOME For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ---------- ---------- ---------- Revenues: Rental income $1,513,091 $1,717,457 $1,850,494 Interest income from direct financing leases 3,437,921 3,174,996 2,688,154 Other interest income 186,038 170,631 46,177 Other income 24,397 122,720 6,138 ---------- ---------- ---------- 5,161,447 5,185,804 4,590,963 ---------- ---------- ---------- Expenses: Interest 1,593,880 1,351,797 731,843 Depreciation 501,657 519,891 499,320 General and administrative 276,283 298,974 274,126 Property expense 618,277 402,928 454,044 Amortization 17,195 16,133 6,848 Writedown to net realizable value 445,551 ---------- ---------- ---------- 3,452,843 2,589,723 1,966,181 ---------- ---------- ---------- Income before gain on sale of real estate 1,708,604 2,596,081 2,624,782 Gain on sale of real estate 23,451 ---------- ---------- ---------- Net income $1,732,055 $2,596,081 $2,624,782 ========== ========== ========== Net income allocated to: Individual General Partner $ 1,732 $ 2,596 $ 2,625 ========== ========== ========== Corporate General Partner $ 15,589 $ 23,365 $ 23,623 ========== ========== ========== Limited Partners $1,714,734 $2,570,120 $2,598,534 ========== ========== ========== Net income per Unit: (55,000 Limited Partnership Units in 1994, 54,975 weighted average Limited Partnership Units in 1995 and 54,900 Limited Partnership Units in 1996) $31.18 $46.75 $47.33 ====== ====== ======
The accompanying notes are an integral part of the consolidated financial statements. - 7 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of PARTNERS' CAPITAL For the years ended December 31, 1994, 1995 and 1996
Partners' Capital Accounts ----------------------------------------------- Limited Partners' General Limited Amount Per Total PARTNERS PARTNERS UNIT (a) ------ -------- -------- ---------- Balance, December 31, 1993 $23,737,447 $183,113 $23,554,334 $428 Distributions (1,458,890) (14,590) (1,444,300) (26) Net income, 1994 1,732,055 17,321 1,714,734 32 ----------- -------- ----------- ---- Balance, December 31, 1994 24,010,612 185,844 23,824,768 434 Repurchase of Limited Partner Units (29,042) (29,042) Distributions (1,491,667) (14,917) (1,476,750) (27) Net income, 1995 2,596,081 25,961 2,570,120 47 ----------- -------- ----------- ---- Balance, December 31, 1995 25,085,984 196,888 24,889,096 454 Distributions (2,303,728) (14,802) (2,288,926) (42) Net income, 1996 2,624,782 26,248 2,598,534 47 ----------- -------- ----------- ---- Balance, December 31, 1996 $25,407,038 $208,334 $25,198,704 $459 =========== ======== =========== ====
(a) Based on the weighted average Units issued and outstanding during all periods. The accompanying notes are an integral part of the consolidated financial statements. - 8 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 1,732,055 $ 2,596,081 $ 2,624,782 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 518,852 536,024 506,168 Cash receipts on direct financing leases less than amortization of unearned income (15,604) (32,043) (199,403) Writedown to net realizable value 445,551 Restructuring fees received, net of costs 3,237,685 Gain on sale of real estate (23,451) Net change in operating assets and liabilities 113,132 (173,738) (139,675) ----------- ----------- ----------- Net cash provided by operating activities 2,770,535 6,164,009 2,791,872 ----------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of real estate 124,615 Additional capitalized costs (6,851) (200,808) ----------- ----------- ----------- Net cash provided by (used in) investing activities 124,615 (6,851) (200,808) ----------- ----------- ----------- Cash flows from financing activities: Distributions to partners (1,458,890) (1,491,667) (2,303,728) Repurchase of Limited Partner Units (29,042) Proceeds from note payable to affiliate 250,000 1,000,000 Payment of note payable to affiliate (1,250,000) Payments of mortgage principal (1,617,464) (1,489,763) (936,587) Proceeds from mortgages 7,000,000 Prepayments of mortgage payable (7,005,103) (5,539,072) Deferred financing costs (72,322) ----------- ----------- ----------- Net cash used in financing activities (3,076,354) (9,765,575) (2,101,709) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (181,204) (3,608,417) 489,355 Cash and cash equivalents, beginning of year 4,367,127 4,185,923 577,506 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 4,185,923 $ 577,506 $ 1,066,861 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. - 9 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: ------------------------------------------- Basis of Consolidation: ----------------------- The consolidated financial statements include the accounts of Corporate Property Associates 2 and its wholly-owned subsidiaries (collectively, the "Partnership"). Use of Estimates: ----------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Leased to Others: ----------------------------- Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Partnership diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States. The leases are accounted for under either the direct financing or operating methods. Such methods are described below: Direct financing method - Leases accounted for under the direct ----------------------- financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the lease. Operating method - Real estate is recorded at cost, revenue is ---------------- recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. The Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of undiscounted cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value. Substantially all of the Partnership's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides. Depreciation: ------------- Depreciation is computed using the straight-line method over the estimated useful lives of components of the particular properties, which range from 5 to 35 years. Cash Equivalents: ----------------- The Partnership considers all short-term, highly-liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Partnership's cash and cash equivalents at December 31, 1995 and 1996 were held in the custody of two financial institutions. - 10 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Other Assets: ------------- Included in other assets are deferred charges which are costs incurred in connection with mortgage note refinancing and are amortized on a straight-line basis over the terms of the mortgages. Income Taxes: ------------- A partnership is not liable for Federal income taxes as each partner recognizes his proportionate share of the partnership income or loss in his tax return. Accordingly, no provision for income taxes is recognized for financial statement purposes. 2. Partnership Agreement: ---------------------- The Partnership was organized on August 9, 1979 under the Uniform Limited Partnership Act of the State of California for the purpose of engaging in the business of investing in and leasing industrial and commercial real estate. The Corporate General Partner purchased 200 Limited Partnership Units in connection with the Partnership's public offering. The Partnership will terminate on December 31, 2017, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement"). The Agreement provides that the General Partners are allocated 1% (1/10 of 1% to the Individual General Partner, William P. Carey, and 9/10 of 1% to the Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey")) and the Limited Partners are allocated 99% of the profits and losses as well as distributions of distributable cash from operations, as defined. The partners are also entitled to receive net proceeds from the sale of the Partnership properties as defined in the Agreement. The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of Partnership assets. Pursuant to the subordination provisions of the Agreement, the preferred return may be paid only after the limited partners receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return ranging from 6% to 9% since the inception of the Partnership. The General Partners interest in such preferred return amounts to $1,048,430 based upon the cumulative proceeds from the sale of assets since the inception of the Partnership through December 31, 1996. The Partnership's ability to satisfy the subordination provisions of the Agreement may not be determinable until liquidation of a substantial portion of the Partnership's assets has been made. 3. Transactions with Related Parties: ---------------------------------- Under the Agreement, a division of W.P. Carey is entitled to receive a property management fee and reimbursement of certain expenses incurred in connection with the Partnership's operations (see Note 11). Property management fee in 1995 includes the effect of a lease restructuring transaction. General and administrative expense reimbursements consist primarily of the actual cost of personnel needed in providing administrative services, necessary to the operation of the Partnership. Property management fee and general and administrative expense reimbursements are summarized as follows:
1994 1995 1996 -------- -------- -------- Property management fee $ 57,148 $254,174 $101,644 General and administrative expense reimbursements 56,265 51,138 51,394 -------- -------- -------- $113,413 $305,312 $153,038 ======== ======== ========
- 11 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATION FINANCIAL STATEMENTS, Continued During 1994, 1995 and 1996, fees aggregating $29,657, $39,370 and $192,086, respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner. The Partnership is a participant in an agreement with W.P. Carey and other affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Partnership's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and 1996 were $46,172, $51,472 and $45,007, respectively. In connection with a note payable to an affiliate, which was paid off in 1996, the Partnership incurred interest expense of $20,335. The Partnership's ownership interests in certain properties are jointly held with affiliated entities as tenants-in-common with the Partnership's ownership interests ranging from 28.5% to 40%. The Partnership accounts for its assets and liabilities relating to tenants- in-common interests on a proportional basis. 4. Real Estate Leased to Others Accounted for Under the Operating Method: ---------------------------------------------------------------------- Scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to approximately $1,981,000 in 1997; $1,774,000 in 1998; $1,767,000 in 1999; $1,772,000 in 2000; and $1,746,000 in 2001 and aggregate approximately $15,938,000 through 2012. Contingent rents were approximately $65,000 in 1996. 5. Net Investment in Direct Financing Leases: ------------------------------------------ Net investment in direct financing leases is summarized as follows:
December 31, ------------------------ 1995 1996 ----------- ----------- Minimum lease payments receivable $37,321,569 $34,832,818 Unguaranteed residual value 22,700,673 22,700,673 ----------- ----------- 60,022,242 57,533,491 Less, Unearned income 39,962,115 37,273,961 ----------- ----------- $20,060,127 $20,259,530 =========== ===========
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to approximately $2,509,000 in 1997; $2,485,000 in 1998; $2,473,000 in 1999, $2,543,000 in 2000; and $2,708,000 in 2001 and aggregate approximately $34,833,000 through 2013. Contingent rents were approximately $176,000 and $149,000 in 1994 and 1995, respectively. No contingent rents were realized in 1996. - 12 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 6. Mortgage Notes Payable: ----------------------- The Partnership's two mortgage notes payable, both of which are limited recourse obligations, are collateralized by the assignment of leases and by real property with a carrying amount as of December 31, 1996 of approximately $18,448,000, before accumulated depreciation. As of December 31, 1996, mortgage notes payable bear interest at rates of 7.24% and 9% per annum. One mortgage note matures in 1998 and the other mortgage note matures in 2010. Scheduled principal payments during each of the next five years following December 31, 1996 and thereafter are as follows:
Year Ending December 31, ------------------------ 1997 $ 895,764 1998 708,924 1999 370,390 2000 397,943 2001 427,546 Thereafter 4,986,494 ---------- Total $7,787,061 ==========
Interest paid was $1,605,141, $1,422,223 and $769,023 in 1994, 1995 and 1996, respectively. 7. Distributions to Partners: -------------------------- Distributions are declared and paid to partners quarterly and are summarized as follows:
Limited Year Ending Distributions Paid to Distributions Paid to Partners' Per December 31, General Partners Limited Partners Unit Amount - ------------ --------------------- --------------------- ------------- 1994 $14,590 $1,444,300 $26.26 ======= ========== ====== 1995 $14,917 $1,476,750 $26.85 ======= ========== ====== 1996: Quarterly distributions: $14,802 $1,465,426 $26.68 Special distribution 823,500 15.00 ------- ---------- ------ Total 1996 $14,802 $2,288,926 $41.68 ======= ========== ======
Distributions of $3,532 to the General Partners and $349,713 to the Limited Partners for the quarter ended December 31, 1996 were declared and paid in January 1997. 8. Income for Federal Tax Purposes: -------------------------------- Income for financial statement purposes differs from income for Federal income tax purposes because of the difference in the treatment of certain items for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows: - 13 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
1994 1995 1996 ------------ ----------- ----------- Net income per Statements of Income $1,732,055 $2,596,081 $2,624,782 Excess tax depreciation (630,883) (612,649) (368,687) Writedown to net realizable value 445,551 Restructuring fee 3,237,685 Other (138,363) (106,511) (288,538) ---------- ---------- ---------- Income reported for Federal income tax purposes $1,408,360 $5,114,606 $1,967,557 ========== ========== ==========
9. Industry Segment Information: ----------------------------- The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate. In 1994, 1995 and 1996, the Partnership earned its total operating revenues (rental income plus interest income from direct financing leases) from the following lease obligors:
1994 % 1995 % 1996 % ---------- ---- ---------- ---- ---------- ---- Unisource Worldwide, Inc. $1,314,240 27% $1,316,677 27% $1,316,677 29% Pre Finish Metals Incorporated 891,558 18 937,772 19 967,600 21 Gibson Greetings, Inc. 1,847,712 37 1,708,392 35 823,776 18 Cleo, Inc. 46,763 1 444,576 10 AT&T Corporation 295,429 6 295,728 6 296,066 7 New Valley Corporation 410,266 8 237,162 5 236,784 5 Other 113,807 2 206,959 4 171,169 4 Maybelline Products Co., Inc. 143,000 3 156,000 3 B & G Contract Packaging, Inc. 126,000 3 Family Dollar Stores, Inc. 78,000 2 ---------- --- ---------- --- ---------- --- $4,951,012 100% $4,892,453 100% $4,538,648 100% ========== === ========== === ========== ===
10. Properties Formerly Leased to New Valley Corporation: ----------------------------------------------------- The Partnership and Corporate Property Associates 3 ("CPA(R):3"), an affiliate, own 39% and 61% interests, respectively, in three properties located in Reno, Nevada; Bridgeton, Missouri; and Moorestown, New Jersey. Until May 1993, the three properties were leased to New Valley Corporation ("New Valley"). On April 1, 1993, New Valley filed a petition of voluntary bankruptcy seeking reorganization under Chapter 11 of the United States Bankruptcy Code. In connection with the bankruptcy filing, the Bankruptcy Court approved New Valley's termination of its lease with the Partnership and CPA(R):3 for the Moorestown, New Jersey property in May 1993. In December 1994, the Bankruptcy Court also approved the termination of New Valley's lease on the Reno property effective December 31, 1994. In connection with the lease termination, the Partnership wrote down the Reno property in 1994 to its estimated net realizable value of $1,295,000 and recognized a charge of $445,551 on the writedown. New Valley continues to lease the Bridgeton property. - 14 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS, Continued In 1995 the Partnership and CPA(R):3 entered into a lease agreement with Sports & Recreation, Inc. ("Sports & Recreation") for the Moorestown property. The agreement provided that after conversion of the facility into a retail store, a lease term of 16 years with an initial rent of $308,750 (of which the Partnership's share is $121,000) would commence. During 1996 Sports & Recreation indicated to the Partnership and CPA(R):3 that it had decided not to occupy the property and would seek to terminate the lease. At that time, the Partnership and CPA(R):3 rejected as inadequate Sports & Recreation's offer of $300,000 as a settlement in exchange for being released from its lease obligations. Sports & Recreation has paid all scheduled rents. The Partnership and CPA(R):3 expect that Sports & Recreation will resume discussions for the purposes of reaching a termination settlement; however, no discussions are currently in progress. On August 28, 1996 the Partnership and CPA(R):3 entered into a lease agreement for the Reno property with Excel Teleservices, Inc. ("Excel"). The lease obligations of Excel have been guaranteed by its parent company, Excel Telecommunications, Inc. The initial lease term commenced on December 26, 1996. Annual rent during the first five years is $532,800 increasing to $580,800 thereafter (of which the Partnership's share is $207,800 and $226,600, respectively). The lease, which has a term of ten years, provides Excel with two five-year renewal options with the rent during such renewal terms based on the then prevailing market rate. Excel has the right to terminate the lease at the end of the sixth lease year. In connection with the termination of the Moorestown and Reno leases, the Partnership and CPA(R):3 expect to receive a bankruptcy settlement from New Valley. The amount of such settlement cannot be estimated and no amounts that the Partnership may ultimately receive have been recorded in the accompanying financial statements. 11. Properties Leased to Gibson Greetings, Inc.: -------------------------------------------- In January 1982, the Partnership and CPA(R):3 entered into a net lease with Gibson Greetings, Inc. ("Gibson"), for three properties in Memphis, Tennessee; Berea, Kentucky; and Cincinnati, Ohio. In 1988, the Partnership and CPA(R):3 consented to Gibson's sublease of the Memphis, Tennessee property to a wholly-owned subsidiary, Cleo, Inc. ("Cleo"). The lease for the three properties had an initial term of 20 years with two five-year renewal options and provided for minimum annual rentals of $5,865,000 with rent increases every five years based on a formula indexed to the CPI. The lease also provided Gibson with a purchase option which was exercisable during the tenth year of the lease and at the end of the initial term. Gibson declined to exercise its purchase option in 1992. In connection with Gibson's sale of the Cleo subsidiary to CSS Industries, Inc. ("CSS"), the Partnership, CPA(R):3 and Gibson entered into an agreement on November 15, 1995, whereby the Memphis, Tennessee property occupied by Cleo was severed from the Gibson master lease, the Gibson lease was amended and Cleo entered into a separate lease for the Tennessee property with CSS as the guarantor of Cleo's lease obligations. The Partnership and CPA(R):3 received $12,200,000 (of which the Partnership's share was $3,477,000) as a one-time lump sum payment in consideration for severing the Tennessee property from the Gibson master lease. Gibson still retains certain specific obligations for any environmental violations which may be detected and which resulted from any pre-existing conditions at the Tennessee property. The Gibson lease on the two remaining properties in Kentucky and Ohio, as amended, provides for an initial term which has been extended through November 30, 2013, and provides for one renewal term of ten years. Annual rent is $3,100,000 (of which the Partnership's share is approximately $733,000), with stated increases of 20% every five years through the end of the - 15 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES to FINANCIAL STATEMENTS, Continued renewal term. The lease includes new purchase options exercisable on November 30, 2005 and 2010 and Gibson has the right to exercise the purchase option on either one of its leased properties or both. The option is exercisable at fair market value of the properties as encumbered by the lease. The Cleo lease provides for a ten-year term through December 31, 2005 with two five-year renewal terms. Annual rent is $1,500,000 (of which the Partnership's share is approximately $355,000), and there is a rent increase effective January 1, 2001. The rent increase will be based on a formula indexed to the CPI; however, the increased annual rent will be at least $1,689,000 but no more than $1,898,000. Cleo has an option to purchase the property at any time during the term of the lease so long as there is no event of monetary default. Exercise of the purchase option requires at least six months' notice. The exercise price is the greater of (i) $15,000,000 or (ii) fair market value capped at a maximum of $16,250,000. In connection with the payment made by Gibson to sever the Tennessee property from the Gibson lease, the Partnership deferred recognition of a gain on restructuring of $3,237,685, consisting of the Partnership's $3,477,000 share of the lump sum payment offset by costs of $239,315 including management fees of $173,000, payable to an affiliate. The Partnership is amortizing such deferral over the remaining initial terms of the Gibson and Cleo leases. The net proceeds from the agreement as well as other available funds were used to pay off the Partnership's share of the mortgage loan collateralized by the Gibson properties of $6,153,000 in November 1995. 12. Environmental Matters: ---------------------- All of the Partnership's properties are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. All of the Partnership's properties are currently leased to corporate tenants. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. The costs for remediation, which are being performed and paid for by the affected tenant at three of the properties, are not expected to be material. In the event that the Partnership absorbs a portion of such costs because of a tenant's failure to fulfill its obligations, the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations. In 1994, based on the results of Phase I environmental reviews performed in 1993, the Partnership voluntarily conducted Phase II environmental reviews on four of its properties. The Partnership believes, based on the results of such Phase I and Phase II reviews, that its properties are in substantial compliance with Federal and state environmental statutes and regulations. Portions of certain properties have been documented as having a limited degree of contamination, principally in connection with either leakage from underground storage tanks or surface spills from facility activities. For those conditions which were identified, the Partnership advised the affected tenant of the Phase II findings and of its obligation to perform required remediation. 13. Disclosures About Fair Value of Financial Instruments: ------------------------------------------------------ The carrying amounts of cash, receivables and accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The Partnership estimates that the fair value of the Partnership's two mortgage notes payable approximates the carrying amount of such mortgage notes at December 31, 1996. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates which take into account the credit of the tenants and interest rate risk. - 16 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1996
Cost Initial Cost to Capitalized Decrease in Gross Amount at which Carried Partnership Subsequent to Net at Close of Period (c)(d) ----------- ----------------------------- Acquisition Investment Description Encumbrances Land Buildings (a) (b) Land Buildings Total - ----------- ------------ ---------- ----------- ------------ ------------ ---------- ----------- --------- Operating Method: Retail store in Greensboro, North Carolina $ 40,946 $ 186,926 $ 14,508 $ 40,946 $ 201,434 $ 242,380 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 Products Co., Inc. and B&G Contract Packaging, Inc. 216,000 3,048,862 25,103 216,000 3,073,965 3,289,965 Land leased to Unisource Worldwide, Inc. $2,278,415 3,575,000 3,575,000 3,575,000 Building leased to Sports & Recreation, Inc. 265,757 1,925,029 $(1,030,786) 140,716 1,019,284 1,160,000 Centralized telephone bureau leased to Excel Telecommuni- cations, Inc. 446,956 1,325,456 198,390 (479,994) 446,956 1,043,852 1,490,808 Warehouse and manufac- turing plant leased to Pre Finish Metals Incorporated 939,068 254,400 6,587,930 33,652 254,400 6,621,582 6,875,982 ---------- ---------- ----------- -------- ----------- ---------- ----------- ----------- $3,217,483 $4,975,474 $13,843,836 $298,224 $(1,510,780) $4,850,433 $12,756,321 $17,606,754 ========== ========== =========== ======== =========== ========== =========== =========== Life on which Depreciation in Latest Statement of Accumulated Date Income Description Depreciation (d) Acquired is Computed - ----------- ---------------- ----------- ------------ Operating Method: Retail store in Greensboro, North Carolina $ 139,023 September 2, 1980 15-35 YRS. Retail store in New Orleans, Louisiana 144,842 January 5, 1981 15-35 YRS. Retail stores leased to Kinko's of Ohio, Inc. and Color Tile, Inc. 415,828 October 1, 1980 15-35 YRS. Warehouse and distribution center leased to, Maybelline Products Co., Inc. and B&G Contract Packaging, Inc. 1,608,633 April 9, 1981 30 YRS. Land leased to Unisource Worldwide, Inc. April 29, 1980 Building leased to Sports & Recreation, Inc. 127,411 November 24, 1981 30 YRS. Centralized telephone bureau leased to Excel Telecommuni- cations, Inc. 56,535 November 24, 1981 30 YRS. Warehouse and manufac- turing plant leased to Pre Finish Metals December 11, 1980 5-30 YRS. Incorporated 3,358,407 and June 30, 1986 ----------- $5,850,679 ===========
See accompanying notes to Schedule. - 17 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1996
Gross Amount at Cost Increase which Carried Initial Cost to Capitalized (Decrease) in at Close of Partnership Subsequent to Net Period (c) ----------------- -------------- ------------- ---------------- Description Encumbrances Land Buildings Acquisition (a) Investment (b) Total Date Acquired ----------- ------------ ---- --------- -------------- ------------- ----- ------------- Direct Financing Method: Office, warehouse and distribution center leased to Unisource Worldwide, Inc. $4,569,578 $ 7,170,000 $ 9,528 $ 817,651 $ 7,997,179 APRIL 29, 1980 Centralized Telephone Bureau leased to New Valley NOVEMBER 24, Corporation $ 350,316 1,980,820 (20,487) 2,310,649 1981 Computer Center leased to NOVEMBER 24, AT&T Corporation 144,958 2,739,941 1,183 23,764 2,909,846 1981 Warehouse and manufacturing buildings leased to Gibson JANUARY 26, Greetings, Inc. 542,693 4,913,459 (1,656,565) 3,799,587 1982 Warehouse and manufacturing buildings JANUARY 26, leased to Cleo, Inc. 323,122 4,315,774 (1,396,627) 3,242,269 1982 ---------- ---------- ----------- ------- ----------- ----------- $4,569,578 $1,361,089 $21,119,994 $10,711 $(2,232,264) $20,259,530 ========== ========== =========== ======= ============ ===========
See accompanying notes to Schedule. - 18 - CORPORATE PROPERTY ASSOCIATES 2 (a California limited partnership) and SUBSIDIARIES NOTES TO SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION (a) Consists of acquisition costs, including legal fees, appraisal fees, title costs and other related professional fees and capitalized improvements. (b) The increase (decrease) in net investment is due to the amortization of unearned income producing a constant periodic rate of return on the net investment 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, 1996, the aggregate cost of real estate owned for Federal income tax purposes is $41,609,249. (d) Reconciliation of Real Estate Accounted --------------------------------------- for Under the Operating Method ------------------------------
December 31, ------------------------ 1995 1996 ----------- ----------- Balance at beginning of year $17,399,095 $17,405,946 Additions 6,851 200,808 ----------- ----------- Balance at close of year $17,405,946 $17,606,754 =========== ===========
Reconciliation of Accumulated Depreciation ------------------------------------------
December 31, ---------------------- 1995 1996 ---------- ---------- Balance at beginning of year $4,831,468 $5,351,359 Depreciation expense 519,891 499,320 ---------- ---------- Balance at close of year $5,351,359 $5,850,679 ========== ==========
- 19 - 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 EXCEL TELE- Land and Reno, Nevada Ownership of an COMMUNICATIONS, Building approximate 39% INC. interest in land and building PRE FINISH METALS Land and Warehouse/ Walbridge, Ohio Ownership of a 40% INCORPORATED Manufacturing Plant interest in land and building (1) MAYBELLINE Land and Warehouse/ Maumelle, Ownership of land PRODUCTS CO., INC. Distribution Center Arkansas and building and B&G CONTRACT PACKAGING, INC. WEXLER & WEXLER LAND AND RETAIL NEW ORLEANS, OWNERSHIP OF LAND STORE LOUISIANA AND BUILDING A. JONES LAND AND RETAIL GREENSBORO, OWNERSHIP OF LAND STORE NORTH CAROLINA AND BUILDING 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. - 20 - 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, 1996, there were 1,981 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 1993:
Cash Distributions Per Unit ---------------------------- 1994 1995 1996 ------ ------ ------ First quarter $ 6.55 $ 6.60 $ 6.94 Second quarter 6.56 6.66 22.03 (a) Third quarter 6.57 6.75 6.35 Fourth quarter 6.58 6.84 6.36 ------ ------ ------ $26.26 $26.85 $41.68 ====== ====== ======
(a) Includes a special distribution of $15 per Limited Partnership 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, 1996 as filed with the Securities and Exchange Commission. - 21 - EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1066861 0 360786 0 0 1427647 37866284 5850679 33682523 204730 7787061 0 0 0 25407038 33682523 0 4590963 0 0 1227490 0 731843 2624782 0 2624782 0 0 0 2624782 47.33 47.33
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