UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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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
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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
(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.
PART I -------
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Item 1. - Financial Information*
Balance Sheets, December 31, 1995 and September 30, 1996 2
Statements of Income for the three and nine months ended
September 30, 1995 and 1996 3
Statements of Cash Flows for the nine months ended
September 30, 1995 and 1996 4
Notes to Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7
PART II
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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.
-1-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART I
------
Item 1. - FINANCIAL INFORMATION
-------------------------------
BALANCE SHEETS
December 31, September 30,
1995 1996
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(Note) (Unaudited)
ASSETS:
Land and buildings, net of
accumulated depreciation of
$5,351,359 at December 31, 1995 and $12,054,587 $11,684,963
$5,725,983 at September 30, 1996
Net investment in direct
financing leases 20,060,127 20,206,724
Cash and cash equivalents 577,506 1,106,450
Accrued interest and rents receivable 348,201 375,582
Other assets 82,862 177,884
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Total assets $33,123,283 $33,551,603
=========== ===========
LIABILITIES:
Mortgage notes payable $ 7,262,720 $ 7,998,320
Note payable to affiliate 250,000
Accrued interest payable 109,632 70,161
Accounts payable and accrued expenses 74,884 88,475
Prepaid rental income and security deposits 282,800 296,694
Accounts payable to affiliates 57,263 72,703
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Total liabilities 8,037,299 8,526,353
=========== ============
PARTNERS' CAPITAL:
General Partners 196,888 204,516
Limited Partners (54,900 Limited Partnership
Units issued and outstanding) 24,889,096 24,820,734
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Total partners' capital 25,085,984 25,025,250
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Total liabilities and
partners' capital $33,123,283 $33,551,603
=========== =============
The accompanying notes are an integral part of the financial statements.
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
-2-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1996 September 30, 1995 September 30, 1996
------------------ ------------------ ------------------ ------------------
Revenues:
Rental income from
operating leases $ 441,454 $ 481,484 $1,281,476 $1,357,546
Interest from direct
financing leases 818,112 671,944 2,450,670 2,014,179
Other interest income 45,242 12,500 146,132 32,368
Other income 50,244
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1,304,808 1,165,928 3,928,522 3,404,093
---------- ---------- ---------- ----------
Expenses:
Interest 347,376 121,273 1,088,585 578,263
Depreciation 129,245 124,695 394,207 374,624
General and administrative 89,513 71,294 223,477 232,913
Property expense 46,898 146,591 304,992 322,928
Amortization 4,299 1,786 12,896 5,062
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617,331 465,639 2,024,157 1,513,790
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Net income $ 687,477 $ 700,289 $1,904,365 $1,890,303
========== ========== ========== ==========
Net income allocated
to General Partners $ 6,875 $ 7,003 $ 19,044 $ 18,903
========== ========== ========== ==========
Net income allocated
to Limited Partners $ 680,602 $ 693,286 $1,885,321 $1,871,400
========== ========== ========== ==========
Net income per Unit:
(55,000 and 54,900
Limited Partnership
Units at September 30,
1995 and 1996) $12.38 $12.63 $34.28 $34.09
====== ====== ====== ======
The accompanying notes are an integral part of the financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
-----------------
1995 1996
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Cash flows from operating activities:
Net income $1,904,365 $1,890,303
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 407,103 379,686
Interest income on direct financing leases
less than scheduled rents (17,626) (146,597)
Net change in operating assets and liabilities (284,445) (51,687)
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Net cash provided by operating activities 2,009,397 2,071,705
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Cash flows from investing activities:
Additional capitalized costs (6,850) (5,000)
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Net cash used in investing activities (6,850) (5,000)
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Cash flows from financing activities:
Distributions to partners (1,111,667) (1,951,037)
Proceeds from note payable to affiliate 1,000,000
Payments of note payable to affiliate (1,250,000)
Retirement of Limited Partner Units (29,042)
Proceeds from mortgage note payable 7,000,000
Prepayment of mortgage notes payable (852,003) (5,539,072)
Payments on mortgage principal (1,149,437) (725,328)
Deferred financing costs (72,324)
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Net cash used in financing activities (3,142,149) (1,537,761)
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Net (decrease) increase in
cash and cash equivalents (1,139,602) 528,944
Cash and cash equivalents, beginning of period 4,185,923 577,506
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Cash and cash equivalents, end of period $ 3,046,321 $ 1,106,450
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 1,106,599 $ 620,515
=========== ===========
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:
---------------------
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, 1995.
Note 2. Distributions to Partners:
-------------------------
Distributions declared and paid to partners during the nine months ended
September 30, 1996 are summarized as follows:
Per Limited
Quarter Ended General Partners Limited Partners Partner Unit
- -------------- ---------------- ---------------- --------------
December 31, 1995 $3,856 $381,700 $ 6.94
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March 31, 1996 $3,898 $385,947 $ 7.03
====== ======== ======
June 30, 1996 $3,521 $348,615 $ 6.35
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Special Distribution:
April 1996 $823,500 $15.00
======== ======
A distribution of $6.36 per Limited Partner Unit for the quarter ended
September 30, 1996 was declared and paid in October 1996.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month and nine-month periods ended September 30, 1995, the
Partnership incurred management fees of $24,534 and $55,730, respectively, and
general and administrative expense reimbursements of $12,779 and $39,735,
respectively, payable to an affiliate. For the three-month and nine-month
periods ended September 30, 1996, the Partnership incurred management fees of
$33,156 and $74,174, respectively, and general and administrative expense
reimbursements of $12,042 and $38,770, 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 nine months ended
September 30, 1995 and 1996 were $39,735 and $35,916, respectively.
-5-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 4. Industry Segment Information:
----------------------------
The Partnership's operations consist of the investment in and the leasing
of industrial and commercial real estate. For the nine-month periods ended
September 30, 1995 and 1996, the Partnership earned its total operating
revenues (rental income plus interest income from financing leases) from
the following lease obligors:
1995 % 1996 %
---- --- ---- ---
Unisource Worldwide, Inc. $ 987,506 27% $987,506 29%
Pre Finish Metals Incorporated 703,178 18 718,326 21
Gibson Greetings, Inc. 1,385,784 37 617,068 18
Cleo, Inc. 322,254 10
AT&T 221,768 6 220,016 7
New Valley Corporation 177,906 5 177,625 5
Maybelline Products Co., Inc. 104,000 3 117,000 4
Other 152,004 4 127,930 4
B&G Contract Packaging, Inc. 84,000 2
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$3,732,146 100% $3,371,725 100%
========== === ========== ===
Note 5. Property in Reno, Nevada:
------------------------
The Partnership and Corporate Property Associates 3 ("CPA(R):3"), an
affiliate, own a property in Reno, Nevada as tenants-in-common with 39% and
61% interests, respectively. The property has been vacant since December
1994 when a lease with New Valley Corporation was terminated pursuant to an
order of the bankruptcy court. On August 28, 1996, the Partnership and
CPA(R):3 entered into a net lease agreement for the Reno property with
Excel Teleservices, Inc. ("Excel"). The lease obligations of Excel have
been guaranteed by its parent company, Excel Communications, Inc.
Under the lease, the Partnership and CPA(R):3 are obligated to fund an
allowance for tenant improvements to the facility of up to $1,341,600. In
addition, the lease requires the Partnership and CPA(R):3 to repair and/or
replace the HVAC system and roof; such repair costs are estimated to amount
to $228,000. The Partnership's share of allowance and repair costs amounts
to approximately $612,000.
The initial lease term of ten years will commence at the earlier of
December 26, 1996 or the date on which Excel commences operations at the
facility. Rent will be $532,800 during the first five years and increase
to $580,800 for the remainder of the initial term (of which the
Partnership's share will be $207,800 and $226,600, respectively). The
lease also 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.
-6-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Results of Operations:
---------------------
Excluding the effect of a $50,000 nonrecurring item included in other
income in 1995, income for the three and nine-month periods ended September
30, 1996 increased by 2% as compared with income for the same periods ended
September 30, 1995. Decreases in lease revenues were offset by decreases
in interest expense. Lease revenues decreased as the result of the
November 1995 restructuring of the Partnership's lease with Gibson
Greetings, Inc. ("Gibson"). As more fully described in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1995, in
agreeing to the restructuring, the Partnership received a substantial lump
sum payment in consideration for severing one of the properties from the
lease and entering into a lease with Cleo, Inc. ("Cleo") for such severed
property and modifying the existing lease with Gibson. Although overall
rentals from the Gibson and Cleo properties were reduced after executing
the new agreements, cash from the lump sum payment was used to retire all
outstanding mortgage debt on the Gibson and Cleo properties. Retiring the
mortgage debt has allowed cash flow from the Gibson and Cleo properties
(rent received less any debt service on the properties) to remain stable.
The decrease in interest expense is due to the payoff of the debt on the
Gibson and Cleo properties at the time of the restructuring, the payoff of
three other mortgage loans in the first quarter of 1996 and the benefit
from refinancing an existing mortgage loan on the Partnership's property
leased to Unisource Worldwide, Inc. ("Unisource"), at a lower rate of
interest, in June 1996. Solely as a result of the Unisource financing,
annual cash flow will increase by $305,000.
Financial Condition:
-------------------
Although there has been no material change in the Partnership's financial
condition since December 31, 1995, the Partnership's cash position has
increased by $578,000 to $1,106,000. The Partnership's cash flow from
operations of $2,072,000 was sufficient to pay scheduled mortgage principal
installments of $725,000 and quarterly distributions of $1,128,000. In
addition, the Partnership paid a special distribution to limited partners
of $823,500 ($15 per Limited Partnership Unit). The Partnership refinanced
an existing loan on the Unisource property and used a portion of the excess
proceeds to pay off the balance of $1,250,000 due to the Corporate General
Partner which had been used, in part, to fund the special distribution to
partners. Because of the lower interest rate obtained on refinancing of
the Unisource property mortgage loan, annual debt service has decreased in
spite of an increase in the outstanding principal balance on the Unisource
property mortgage loan to $7,000,000 from $5,539,000.
With the increase in the Partnership's cash position, the Partnership
should have sufficient cash reserves to fully fund its $612,000 share of
capital costs required under the Excel Teleservices, Inc. ("Excel") lease.
The Partnership's annual cash flow will increase by $208,000 when Excel
commences paying rent. The Partnership received $30,000 during the third
quarter for its share of rents from Sports & Recreation, Inc. ("Sports &
Recreation") for the Moorestown, New Jersey property and has received all
subsequent rents. Sports & Recreation had been in the process of
renovating the Moorestown property, but has decided not to occupy the
property. The Partnership and Sports & Recreation previously engaged in
discussions regarding a settlement of the lease obligation, and the
Partnership would consider new settlement proposals. The Partnership's
lease with Maybelline Products Co., Inc. for 50% of the leaseable space at
the warehouse facility in Maumelle, Arkansas expires on December 31, 1996.
An extension is being negotiated which will allow Maybelline to terminate
the lease at any time upon 90 days notice. Annual rent from the Maybelline
lease is $156,000.
The General Partners are currently investigating ways to provide liquidity
for limited partners on a tax-effective basis.
-7-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART II
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Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended September 30, 1996, the Partnership was not
required to file any reports on Form 8-K.
-8-
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
SIGNATURES
----------
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.
11/8/96 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
11/8/96 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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