1
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, 1997
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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
2
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
INDEX
Page No.
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PART I
Item 1. - Financial Information*
Consolidated Balance Sheets, December 31, 1996 and
September 30, 1997 2
Consolidated Statements of Income for the three and nine
months ended September 30, 1996 and 1997 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1997 4
Notes to Consolidated Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7
PART II
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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3
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART I
Item 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1996 1997
------------ -------------
(Note) (Unaudited)
ASSETS:
Land and buildings, net of
accumulated depreciation of
$5,850,679 at December 31, 1996 and $11,756,075 $11,797,128
$6,240,244 at September 30, 1997
Net investment in direct
financing leases 20,259,530 20,420,130
Cash and cash equivalents 1,066,861 1,277,945
Other assets 600,057 834,792
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Total assets $33,682,523 $34,329,995
=========== ===========
LIABILITIES:
Mortgage notes payable $ 7,787,061 $ 7,123,099
Accrued interest payable 75,233 71,129
Accounts payable and accrued expenses 66,050 50,591
Prepaid rental income and security deposits 283,694 313,669
Accounts payable to affiliates 63,447 50,375
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Total liabilities 8,275,485 7,608,863
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PARTNERS' CAPITAL:
General Partners 208,334 221,475
Limited Partners (54,900 Limited Partnership
Units issued and outstanding) 25,198,704 26,499,657
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Total partners' capital 25,407,038 26,721,132
----------- -----------
Total liabilities and
partners' capital $33,682,523 $34,329,995
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1997 September 30, 1996 September 30, 1997
------------------ ------------------ ------------------ ------------------
Revenues:
Rental income from
operating leases $ 481,484 $ 534,309 $1,357,546 $1,604,892
Interest from direct
financing leases 671,944 681,864 2,014,179 2,039,136
Other interest income 12,500 16,406 32,368 43,750
---------- ---------- ---------- ----------
1,165,928 1,232,579 3,404,093 3,687,778
---------- ---------- ---------- ----------
Expenses:
Interest 121,273 133,850 578,263 415,208
Depreciation 124,695 129,855 374,624 389,565
General and administrative 71,294 52,800 232,913 199,674
Property expense 146,591 118,413 322,928 302,480
Amortization 1,786 1,786 5,062 5,357
---------- ---------- ---------- ----------
465,639 436,704 1,513,790 1,312,284
---------- ---------- ---------- ----------
Net income $ 700,289 $ 795,875 $1,890,303 $2,375,494
========== ========== ========== ==========
Net income allocated
to General Partners $ 7,003 $ 7,959 $ 18,903 $ 23,755
========== ========== ========== ==========
Net income allocated
to Limited Partners $ 693,286 $ 787,916 $1,871,400 $2,351,739
========== ========== ========== ==========
Net income per Unit:
(54,900 Limited
Partnership Units) $12.63 $14.35 $34.09 $42.83
====== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
------------------------
1996 1997
---- ----
Cash flows from operating activities:
Net income $ 1,890,303 $ 2,375,494
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 379,686 394,922
Other noncash items (146,597) (160,600)
Net change in operating assets and liabilities (51,687) (242,752)
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Net cash provided by operating activities 2,071,705 2,367,064
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Cash flows from investing activities:
Additional capitalized costs (5,000) (430,618)
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Net cash used in investing activities (5,000) (430,618)
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Cash flows from financing activities:
Distributions to partners (1,951,037) (1,061,400)
Prepayment of mortgage notes payable (5,539,072)
Proceeds from issuance of mortgage note payable 7,000,000
Payments on mortgage principal (725,328) (663,962)
Payments on note payable to affiliate (1,250,000)
Proceeds from issuance of note payable to
affiliate 1,000,000
Deferred financing costs (72,324)
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Net cash used in financing activities (1,537,761) (1,725,362)
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Net increase in cash and cash equivalents 528,944 211,084
Cash and cash equivalents, beginning of period 577,506 1,066,861
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Cash and cash equivalents, end of period $ 1,106,450 $ 1,277,945
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 620,515 $ 419,312
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
NOTES TO CONSOLIDATED 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, 1996.
Note 2. Distributions to Partners:
Distributions declared and paid to partners during the nine months ended
September 30, 1997 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
December 31, 1996 $3,532 $349,713 $6.37
====== ======== =====
March 31, 1997 $3,538 $350,262 $6.38
====== ======== =====
June 30, 1997 $3,544 $350,811 $6.39
====== ======== =====
A distribution of $6.40 per Limited Partner Unit for the quarter ended September
30, 1997 was declared and paid in October 1997.
Note 3. Transactions with Related Parties:
For the three-month and nine-month periods ended September 30, 1996, the
Partnership incurred property 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. For the three-month and
nine-month periods ended September 30, 1997, the Partnership incurred property
management fees of $20,615 and $90,978, respectively, and general and
administrative expense reimbursements of $14,011 and $46,224, respectively,
payable to an affiliate. Management believes that ultimate payment of a
preferred return to the General Partners of $1,048,845, based upon cumulative
proceeds of sales of assets, is reasonably possible but not probable, as defined
in Statement of Financial Accounting Standards No. 5, and no accrual for such
preferred return has been reflected in the accompanying Consolidated Financial
Statements.
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, 1996 and 1997 were $35,916 and $24,584, respectively.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
NOTES TO CONSOLIDATED 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, 1996 and 1997, the Partnership earned its total operating revenues
(rental income plus interest income from financing leases) from the following
lease obligors:
1996 % 1997 %
---- ---- ---- ---
Unisource Worldwide, Inc. $ 987,506 29% $ 991,808 27%
Prefinish Metals Incorporated 718,326 21 725,756 20
Gibson Greetings, Inc. 617,068 18 628,208 17
Cleo, Inc. 322,254 10 342,067 9
AT&T Corporation 220,016 7 222,154 6
Western Union Financial Services, Inc. 177,625 5 177,194 5
Excel Communications, Inc. 156,724 4
B&G Contract Packaging, Inc. 84,000 2 153,000 4
Maybelline Products Co., Inc. 117,000 4 91,000 3
Sports & Recreation, Inc. 30,273 1 90,819 3
Other 97,657 3 65,298 2
---------- ---- ---------- ---
$3,371,725 100% $3,644,028 100%
========== ==== ========== ====
Note 5. Consent Solicitation:
On October 15, 1997, Carey Diversified LLC ("CDSM") filed a Consent Solicitation
Statement/Prospectus ("consent solicitation") with the United States Securities
and Exchange Commission. The General Partners are proposing that the Limited
Partners of the nine CPA(R) limited partnerships approve a transaction in which
each CPA(R) limited partnership would be merged with a subsidiary partnership of
CDSM, of which CDSM is the general partner. As described in the consent
solicitation, each limited partner would have the option of either exchanging
his or her limited partnership units for an interest in CDSM ("Listed Shares")
or to retain a limited partnership interest in the subsidiary partnership
("Subsidiary Partnership Units"). If the holders of a majority of the
outstanding limited partnership units of the Partnership consent to the
transaction, the merger of the Partnership with the corresponding subsidiary
partnership of CDSM may be consummated. If the transaction is consummated, the
General Partners will exchange a portion of their general partnership interests
in exchange for Listed Shares. The transaction will not occur unless the CPA(R)
Partnerships approving the transaction represent at least $200,000,000 in Total
Exchange Value, as defined. There is no assurance that the holders of limited
partnership units of the Partnership will consent to the transaction or that the
transaction will occur.
If the transaction is completed, the Listed Shares will be listed and publicly
traded on the New York Stock Exchange. Subsidiary Partnership Units will provide
substantially the same economic interest and legal rights as those of a limited
partnership unit in the Partnership, but will not be listed on a securities
exchange. Conversion of limited partnership units to Listed Shares or Subsidiary
Partnership Units will not result in a taxable event to the limited partners.
The risk factors and benefits relating to the proposed transaction are described
in the consent solicitation. The General Partners, as well as all the Directors
of the Corporate General Partners of the CPA(R) Partnerships, have unanimously
approved the proposed transaction.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
Results of Operations:
Net income for the three-month and nine-month periods ended September 30,
1997 increased by $96,000 and $485,000, respectively, as compared with the
similar periods ended September 30, 1996. Income for both periods benefited from
an increase in lease revenues. The three-month period also benefited from a
decrease in property expense. The nine-month period benefited from a decrease in
interest expense.
Lease revenues increased due to the commencement of new leases with Sports &
Recreation, Inc. and Excel Communications, Inc. in July 1996 and December 1996,
respectively, as well as full occupancy of the Maumelle, Arkansas distribution
facility in 1997. The Maumelle facility was not fully leased until the second
quarter of 1996. As of August 1997, B&G Contracting, Inc. is occupying 100% of
the facility and took possession of the space which Maybelline Products Co.,
Inc. relinquished on July 31, 1997. The decrease in property expense was due to
the net leases entered into with Sports & Recreation and Excel at the
Partnership's properties in Moorestown, New Jersey and Reno, Nevada,
respectively. A net lease requires the lessee to absorb the costs associated
with operating a property including the costs of maintenance, insurance and real
estate taxes. Prior to entering into the leases, the properties were vacant and
the Partnership absorbed such costs. The benefit to property expense from the
absorption of the costs by lessees at the Moorestown and Reno properties was
partially offset by legal costs incurred in connection with the Partnership's
bankruptcy claim against New Valley Corporation. New Valley terminated its
leases on the Moorestown and Reno properties in 1993 and 1994, respectively, in
connection with its voluntary bankruptcy petition. A final ruling on the
Partnership's claim against New Valley is expected before the end of the year.
Although the Partnership believes it will ultimately receive substantial
proceeds from its claim, the amount cannot be currently estimated. The decrease
in interest expense was due to the refinancing of the mortgage loan
collateralized by the property leased to Unisource Worldwide, Inc. in 1996.
Financial Condition:
There has been no material change in the Partnership's financial condition
since December 31, 1996. Cash flow from operations of $2,367,000 was sufficient
to fund quarterly distributions to partners of $1,061,000 and pay scheduled
mortgage principal installments of $664,000. In addition, operating cash flow
was sufficient to fully fund the final installment of improvements to the Excel
property during the first quarter of 1997. The Partnership currently has
mortgage debt outstanding on two properties. Both mortgage loans are scheduled
to fully amortize. The Partnership expects to pay off these loans from future
operating cash flow.
As more fully described in Note 5 to the Consolidated Financial Statements,
the General Partners have distributed to Limited Partners a consent solicitation
which proposes an exchange of limited partnership units for securities in a
publicly-traded limited liability company. The exchange would not result in a
taxable event to the limited partners, and the General Partners believe that
this proposed transaction will provide limited partners with liquidity on a
tax-effective basis. There is no assurance that the proposed transaction will be
completed.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART II
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended September 30, 1997, the Partnership was
not required to file any reports on Form 8-K.
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10
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.
11/06/97 By: /s/ Steven M. Berzin
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Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/06/97 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
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