OMB APPROVAL
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OMB Number 3235-0070
UNITED STATES Expires October 31,1995
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 Estimated average burden
FORM 10-Q hours per response 190.00
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(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________________ to ____________________________
Commission file number 0-9727
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CORPORATE PROPERTY ASSOCIATES 2
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(Exact name of registrant as specified in its charter)
CALIFORNIA 13-3022196
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
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(Address of principal executive offices) (Zip Code)
(212) 492-1100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[_] Yes [_] No
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
INDEX
Page No.
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PART I
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Item 1. - Financial Information*
Balance Sheets, December 31, 1994 and
March 31, 1995 2
Statements of Income for
the three months ended
March 31, 1994 and 1995 3
Statements of Cash Flows
for the three months ended
March 31, 1994 and 1995 4
Notes to Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7
PART II
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Item 1. - Legal Proceedings 8
Item 6. - Exhibits and Reports on Form 8-K 8
Signatures 9
*The summarized financial information contained herein is unaudited;
however in the opinion of management, all adjustments necessary for a fair
presentation of such financial information have been included.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART I
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Item 1. - FINANCIAL INFORMATION
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BALANCE SHEETS
December 31, March 31,
1994 1995
------------- ------------
(Note) (Unaudited)
ASSETS:
Land and buildings, net of
accumulated depreciation of
$4,831,468 at December 31, 1994 and
$4,963,949 at March 31, 1995 $12,567,627 $12,435,146
Net investment in direct
financing leases 23,265,769 23,271,037
Cash and cash equivalents 4,185,923 3,237,641
Accrued interest and rents receivable 461,360 449,651
Other assets 90,063 59,496
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Total assets $40,570,742 $39,452,971
=========== ===========
LIABILITIES:
Mortgage notes payable $15,757,586 $14,499,540
Accrued interest payable 182,839 172,836
Accounts payable and accrued expenses 249,991 123,592
Accounts payable to affiliates 53,037 79,148
Prepaid rental income and security deposits 316,677 350,339
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Total liabilities 16,560,130 15,225,455
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PARTNERS' CAPITAL:
General Partners 185,844 188,013
Limited Partners (55,000 Limited
Partnership Units issued and
outstanding) 23,824,768 24,039,503
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Total partners' capital 24,010,612 24,227,516
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Total liabilities and
partners' capital $40,570,742 $39,452,971
=========== ===========
The accompanying notes are an integral part of the financial statements.
Note: The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31, 1994 March 31, 1995
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Revenues:
Rental income from operating leases $ 431,882 $ 407,507
Interest income from direct financing
leases 859,534 816,283
Other interest income 36,416 54,739
Other income 22,572 50,244
Gain on sale of real estate 23,451
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1,373,855 1,328,773
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Expenses:
Interest on mortgages 406,129 384,240
Depreciation 125,414 132,481
General and administrative 67,986 72,241
Property expenses 85,406 151,942
Amortization 4,298 4,298
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689,233 745,202
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Net income $ 684,622 $ 583,571
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Net income allocated
to General Partners $ 6,846 $ 5,836
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Net income allocated
to Limited Partners $ 677,776 $ 577,735
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Net income per Unit:
(55,000 Limited
Partnership Units) $12.32 $10.50
====== ======
The accompanying notes are an integral part of the financial statements.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
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1994 1995
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Cash flows from operating activities:
Net income $ 684,622 $ 583,571
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 129,712 136,779
Other noncash items (3,954) (5,268)
Gain on sale of real estate (23,451)
Net change in operating assets and
liabilities (10,226) (38,651)
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Net cash provided by operating activities 776,703 676,431
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Cash flows from investing activities:
Proceeds from sale of real estate 124,615
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Net cash provided by investing activities 124,615
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Cash flows from financing activities:
Distributions to partners (363,889) (366,667)
Prepayment of mortgage notes payable (852,003)
Payments on mortgage principal (389,622) (406,043)
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Net cash used in financing activities (753,511) (1,624,713)
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Net increase (decrease) in cash
and cash equivalents 147,807 (948,282)
Cash and cash equivalents, beginning of period 4,367,127 4,185,923
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Cash and cash equivalents, end of period $4,514,934 $ 3,237,641
========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 409,926 $ 394,243
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The accompanying notes are an integral part of the financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
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The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. For further information, refer
to the financial statements and footnotes thereto included in the
Partnership's Annual Report on Form 10-K for the year ended December 31,
1994.
Note 2. Distributions to Partners:
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Distributions declared and paid to partners during the three months ended
March 31, 1995 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
------------- ---------------- ---------------- ------------------------
December 31, $3,667 $363,000 $6.60
1994 ====== ======== =====
A distribution of $6.66 per Limited Partner Unit for the quarter ended
March 31, 1995 was declared and paid in April 1995.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month periods ended March 31, 1994 and 1995, the Partnership
incurred management fees of $21,277 and $10,889, respectively, and general
and administrative expense reimbursements of $15,396 and $14,131,
respectively, payable to an affiliate.
The Partnership, in conjunction with certain affiliates, is a participant
in a cost sharing agreement for the purpose of renting and occupying office
space. Under the agreement, the Partnership pays its proportionate share
of rent and other costs of occupancy. Net expenses incurred for the three
months ended March 31, 1994 and 1995 were $10,431 and $22,264,
respectively.
Note 4. Industry Segment Information:
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The Partnership's operations consist of the investment in and the leasing
of industrial and commercial real estate. For the three-month periods
ended March 31, 1994 and 1995, the Partnership earned its total operating
revenues (rental income plus interest income from financing leases) from
the following lease obligors:
1994 % 1995 %
---------- ---- ---------- ----
Gibson Greetings, Inc. $ 461,928 36% $ 461,928 38%
Unisource Worldwide, Inc. 328,560 25 328,560 27
Pre Finish Metals Incorporated 216,785 17 233,347 19
AT&T Corporation 73,831 6 73,903 6
New Valley Corporation 102,647 8 59,324 5
Other 107,665 8 40,728 3
Maybelline Products Co., Inc. 26,000 2
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$1,291,416 100% $1,223,790 100%
========== === ========== ===
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Property in Maumelle, Arkansas:
------------------------------
On January 10, 1995 and March 7, 1995, the Partnership executed lease
agreements with Maybelline Products Co., Inc. ("Maybelline") and A-Pak
Packaging, Inc. ("A-Pak"), respectively, to occupy 100% of the leasable
space at the Partnership's distribution facility in Maumelle, Arkansas.
The Maybelline lease was effective as of February 1, 1995 with the lease
term ending December 31, 1996 and provides for monthly rentals of $13,000.
The A-Pak lease is effective on March 20, 1995, with the lease term
expiring on February 28, 1998, and provides for monthly rentals of $11,333
in 1995 and increasing by $1,667 in each lease year thereafter. The
property had previously been leased to Family Dollar Stores, Inc. which
occupied the property until March 31, 1994. Under the Maybelline and A-Pak
leases, the tenants are obligated to reimburse the Partnership for the cost
of maintenance and insurance.
Note 6. Prepayment of Mortgage Notes Payable:
------------------------------------
On February 23, 1995, the Partnership paid off three mortgage loans on
properties formerly leased to New Valley Corporation ("New Valley") in
Moorestown, New Jersey and Reno, Nevada and a property in Bridgeton,
Missouri, currently leased to New Valley. The aggregate prepayment made by
the Partnership was $852,003. As a result of the prepayment, the
Partnership's annual debt service will decrease by $359,215. The loans had
been scheduled to fully amortize between April 1997 and May 1998.
Note 7. Property in Moorestown, New Jersey:
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On April 7, 1995, the Partnership and Corporate Property Associates 3
("CPA(R):3"), an affiliate, which own the Moorestown, New Jersey property
as tenants-in-common, entered into a net lease for the property with Sports
& Recreation, Inc. ("Sports & Recreation") which intends to convert the
facility into a retail store.
The lease provides for a feasibility period through September 30, 1995
which is extendable through December 31, 1995 followed by an initial term
of 16 years. If, during the feasibility period, Sports & Recreation is
unable to meet conditions necessary to retrofit the facility to its
specifications or obtain certain approvals from the municipal authorities,
it has the right to terminate the lease. During the feasibility period,
the Partnership and CPA(R):3 will reimburse Sports & Recreation for certain
planning costs up to a maximum of $24,000. Sports & Recreation will incur
all costs of retrofitting the facility; however, the Partnership and
CPA(R):3 will reimburse Sports & Recreation for the cost of removing and
disposing of the roof and HVAC system, replacement of the HVAC system and
installing a new roof and drainage system.
During the 16 year lease term, which is scheduled to commence at the end of
the feasibility period, annual rentals will initially be $308,750 (of which
the Partnership's share is approximately $121,000) during the first five
lease years with stated increases every five years thereafter. There is no
assurance that the lease will extend beyond the feasibility period.
Note 8. Resolution of Litigation:
------------------------
In April 1995, the Partnership received notification that a favorable
judgment had been rendered on March 15, 1995 by the Court of Common Pleas
of Montgomery County, Pennsylvania in connection with certain litigation
commenced by Ascott Investment Company ("Ascott") against the Partnership
and General Refactories Company ("GRX"). Ascott had sought damages
relating to the Partnership's sale of a property to GRX in 1986. The Court
ruled that the Partnership and GRX had acted in good faith in executing the
transfer of the property and dismissed all of Ascott's complaints.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Net income for the three-month period ended March 31, 1995 decreased by
$101,000 as compared with the three-month period ended March 31, 1994. The
decrease was primarily attributable to a decrease in lease revenues and an
increase in property expenses. The decrease in lease revenues is due to
termination of the lease with New Valley Corporation ("New Valley") on
December 31, 1994 for a property in Reno, Nevada and lower revenues on the
Maumelle, Arkansas distribution facility property in 1995 as compared with
1994. The Maumelle property had been occupied until March 1994 by Family
Dollar Stores, Inc. and contributed $78,000 of lease revenues during the
quarter ended March 31, 1994; however, the property was vacant until new
leases were executed with Maybelline Products Co., Inc. and A-Pak
Packaging, Inc. during the quarter ended March 31, 1995. The increase in
property expense is due to the carrying costs incurred during the current
period for the Reno and Maumelle properties. Interest expense decreased as
the result of paying off three mortgage loans in February 1995. Although
the Partnership benefited from other income of $50,000 from a nonrecurring
source in 1995, the Partnership's results of operations for the period
ended March 31, 1994 also reflected $46,000 of income from nonrecurring
items.
There has been no material change in the Partnership's financial
condition since December 31, 1994 and Management believes that the current
cash balance of $3,238,000 and cash provided from operating activities will
be sufficient to meet the Partnership's current cash requirements which
currently consist solely of paying quarterly distributions and meeting
scheduled debt service obligations. During the current quarter, the
Partnership satisfied its obligations on three mortgage loans by using
$852,003 of its cash reserves to prepay three loans. As a result of these
prepayments, annual debt service will decrease by $359,000. To the extent
that Sports & Recreation, Inc. is able to meet the conditions necessary to
retrofit the Moorestown property to use as a retail store, the Partnership
will be committed to pay its share of costs for rehabilitation of the roof
and heating, ventilation and air conditioning systems. Although such costs
are in the process of being determined, Management believes that such costs
can be funded from existing cash reserves, if necessary. As a result of
the terminations of the New Valley leases for the Reno and Moorestown
properties in December 1994 and May 1993, respectively, pursuant to New
Valley's petition of voluntary bankruptcy, the Partnership anticipates that
it will receive a payment of its claim against New Valley; however, the
amount of such payment has not yet been determined.
-7-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART II
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Item 1. - LEGAL PROCEEDINGS
---------------------------
During 1982, one of Registrant's tenants, GRX Refractories
Company ("GRX"), indicated that it desired to terminate its lease and
relocate its headquarters from Registrant's building in Bala Cynwyd,
Pennsylvania, to another location in order to consolidate its
operations. For this and other reasons, the General Partners decided
to seek a buyer for the building. Registrant had previously held only
a leasehold interest in the land and building subleased to GRX. To
better market the building, Registrant purchased the underlying land
and building in November 1983 with funds from its working capital
reserve. On March 22, 1984, Registrant signed a Purchase and Sale
Agreement to sell the GRX land and building (the "GRX Property") to
Ascott Investment Corporation ("Ascott").
On March 27, 1984, GRX commenced litigation against Registrant,
the Corporate General Partner and Ascott. GRX, in its Amended
Complaint filed on August 22, 1984, requested, among other relief,
that the proposed sale of the GRX Property be enjoined, that the
sublease between GRX and Registrant be cancelled, and that any profits
from Registrant's sale of the building (assuming the sale is
consummated) be split equally between GRX and Registrant. On July 23,
1985, the Registrant, the Corporate General Partner and GRX entered
into a settlement agreement in which GRX agreed to dismiss this
litigation.
On December 31, 1984, Ascott commenced litigation against
Registrant, the Corporate General Partner and GRX alleging in its
Complaint, among other things, that the Registrant had breached its
duty of good faith and fair dealing with respect to the proposed
purchase and that the Registrant engaged in a conspiracy with the
other defendants to enrich themselves at the expense of Ascott.
Ascott was seeking $1,000,000 in compensatory damages and punitive
damages in an unspecified amount.
On March 15, 1995, the Court of Common Pleas of Montgomery County
entered a ruling in favor of Registrant and the other defendants with
regard to all of Ascott's claims. Ascott has the right to appeal this
ruling but the Registrant does not expect such an appeal or if an
appeal is filed, for such an appeal to be successful. Furthermore,
the above mentioned settlement agreement with GRX provides that the
Registrant, upon the satisfaction by it of certain conditions, will be
indemnified and held harmless by GRX for any damages and expenses as
may ever be adjudicated in favor of Ascott in this suit.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended March 31, 1995, the Partnership was not
required to file any reports on Form 8-K.
-8-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
By: W.P. CAREY & CO., INC.
05/10/95 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
05/10/95 By: /s/ Michael D. Roberts
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Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
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