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 JUNE 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
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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)
(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.
[X] Yes [ ] No
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
INDEX
Item 1. - Financial Information*
Balance Sheets, December 31, 1995 and
June 30, 1996 2
Statements of Income for the three and six
months ended June 30, 1995 and 1996 3
Statements of Cash Flows for the six
months ended June 30, 1995 and 1996 4
Notes to Financial Statements 5-7
Item 2. - Management's Discussion of Operations 8
PART II
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Item 6. - Exhibits and Reports on Form 8-K 9
Signatures 10
*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 1
------
Item 1. - FINANCIAL INFORMATION
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BALANCE SHEETS
December 31, June 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 $11,809,658
$5,601,288 at June 30, 1996
Net investment in direct
financing leases 20,060,127 20,155,950
Cash and cash equivalents 577,506 978,629
Accrued interest and rents receivable 348,201 380,436
Other assets 82,862 166,973
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Total assets $33,123,283 $33,491,646
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LIABILITIES:
Mortgage notes payable $ 7,262,720 $ 8,204,745
Note payable to affiliate 250,000
Accrued interest payable 109,632 101,674
Accounts payable and accrued expenses 74,884 46,993
Prepaid rental income and security deposits 282,800 283,694
Accounts payable to affiliates 57,263 177,443
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Total liabilities 8,037,299 8,814,549
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PARTNERS' CAPITAL:
General Partners 196,888 201,034
Limited Partners (54,900 Limited Partnership
Units issued and outstanding) 24,889,096 24,476,063
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Total partners' capital 25,085,984 24,677,097
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Total liabilities and
partners' capital $33,123,283 $33,491,646
=========== ===========
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.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1996 June 30, 1995 June 30, 1996
------------------ ---------------- ------------- -------------
Revenues:
Rental income from
operating leases $ 432,515 $ 450,480 $ 840,022 $ 876,062
Interest from direct
financing leases 816,275 670,006 1,632,558 1,342,235
Other interest income 46,151 9,158 100,890 19,868
Other income 50,244
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1,294,941 1,129,644 2,623,714 2,238,165
---------- ---------- ---------- ----------
Expenses:
Interest 356,969 277,042 741,209 456,990
Depreciation 132,481 124,696 264,962 249,929
General and administrative 61,723 91,668 133,964 161,619
Property expense 106,152 42,407 258,094 176,337
Amortization 4,299 1,101 8,597 3,276
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661,624 536,914 1,406,826 1,048,151
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Net income $ 633,317 $ 592,730 $1,216,888 $1,190,014
========== ========== ========== ==========
Net income allocated
to General Partners $ 6,333 $ 5,927 $ 12,169 $ 11,900
========== ========== ========== ==========
Net income allocated
to Limited Partners $ 626,984 $ 586,803 $1,204,719 $1,178,114
========== ========== ========== ==========
Net income per Unit:
(55,000 and 54,900
Limited Partnership
Units at June 30, 1995
and 1996) $11.40 $10.69 $21.90 $21.46
====== ====== ====== ======
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)
Six Months Ended
June 30,
------------------------
1995 1996
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Cash flows from operating activities:
Net income $1,216,888 $1,190,014
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 273,559 253,205
Interest income on direct financing leases in
excess of scheduled rents (17,378) (95,823)
Net change in operating assets and liabilities (278,791) 37,927
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Net cash provided by operating activities 1,194,278 1,385,323
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Cash flows from investing activities:
Additional capitalized costs (5,000)
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Net cash used in investing activities (5,000)
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Cash flows from financing activities:
Distributions to partners (736,667) (1,598,901)
Prepayment of mortgage notes payable (852,003) (5,539,072)
Proceeds from mortgage note payable 7,000,000
Payments on mortgage principal (772,872) (518,903)
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 (2,361,542) (979,200)
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Net (decrease) increase in
cash and cash equivalents (1,167,264) 401,123
Cash and cash equivalents, beginning of period 4,185,923 577,506
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Cash and cash equivalents, end of period $3,018,659 $ 978,629
========== ==========
Supplemental disclosure of cash flows information:
Interest paid $ 755,475 $ 464,948
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The accompanying notes are an integral part of the financial statements.
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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, 1995.
Note 2. Distributions to Partners:
-------------------------
Distributions declared and paid to partners during the six-months ended June 30,
1996 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
- ---------------------------- ---------------- ---------------- ------------------------
December 31, 1995 $3,856 $381,700 $ 6.94
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March 31, 1996 $3,898 $385,947 $ 7.03
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Special Distribution:
April 1996 $823,500 $15.00
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A distribution of $6.35 per Limited Partner Unit for the quarter ended June
30, 1996 was declared and paid in July 1996.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month and six-month periods ended June 30, 1995, the Partnership
incurred management fees of $20,307 and $31,196, respectively, and general and
administrative expense reimbursements of $12,825 and $26,956, respectively,
payable to an affiliate. For the three-month and six-month periods ended June
30, 1996, the Partnership incurred management fees of $18,558 and $41,018,
respectively, and general and administrative expense reimbursements of $11,549
and $26,728, 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 six months ended June
30, 1995 and 1996 were $28,846 and $26,141, respectively.
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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 six-month periods ended
June 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 %
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Unisource Worldwide, Inc. $ 657,120 26% $ 658,338 30%
Pre Finish Metals Incorporated 468,448 19 478,271 21
Gibson Greetings, Inc. 923,856 37 411,592 19
Cleo, Inc. 220,736 10
AT&T 147,819 6 147,989 7
New Valley Corporation 118,626 5 118,442 5
Other 87,935 4 62,929 3
Maybelline Products Co., Inc. 68,776 3 78,000 3
B&G Contract Packaging, Inc. 42,000 2
---------- --- ---------- ---
$2,472,580 100% $2,218,297 100%
========== === ========== ===
Note 5. Property in Maumelle, Arkansas:
------------------------------
On April 29, 1996, the Partnership executed a lease agreement with B & G
Contract Packaging, Inc. for 50% of the leasable space at the
Partnership's distribution facility in Maumelle, Arkansas. The lease
provides for monthly rentals of $14,000, retroactive to February 19,1996,
with an initial term through December 31, 1997 followed by two two-year
renewal terms at the lessee's option. The remaining leasable space at the
Maumelle facility is currently leased to Maybelline Products Co., Inc.
Note 6. Property in Moorestown, New Jersey:
----------------------------------
On April 7, 1995, the Partnership and Corporate Property Associates 3
(CPA(R):3), an affiliate, which own a property in Moorestown, New Jersey,
as tenants-in-common with ownership interests of 39% and 61%, respectively,
entered into a net lease for the Moorestown property with Sports &
Recreation, Inc. ("Sports & Recreation"). The lease provided for an
initial term of 16 years with an initial annual rent of $308,750 (of which
the Partnership's share would be $121,000). The lease provided for a
feasibility period through December 31, 1995 with an option for Sports &
Recreation to terminate the lease on or before the expiration of such
feasibility period. Sports & Recreation did not exercise its option and,
in January 1996, commenced construction to convert the facility into a
retail store (with the Partnership and CPA(R):3 having an obligation to
reimburse Sports & Recreation for certain construction costs).
Sports & Recreation was scheduled to make its first monthly rental payment
on July 1, 1996; however, no rental payment was received. On July 2, 1996,
Sports & Recreation notified the Partnership and CPA(R):3 that it intended
to terminate the lease, offering $300,000 as a settlement in exchange for
being released from its lease obligations. The Partnership and CPA(R):3
rejected this offer as inadequate and made a counter-offer to Sports &
Recreation as to the amount that they would accept in order to release
Sports & Recreation from its obligations. In addition, the Partnership and
CPA(R):3 have declared the lease in default and intend to seek various
remedies available under the lease. As a result of this dispute and the
nonpayment of rent by Sports & Recreation, the Partnership has not
recognized any rental income from the Sports & Recreation lease in the
accompanying financial statements.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 7. Property in Reno, Nevada:
------------------------
The Partnership and CPA(R):3 own a property in Reno, Nevada as tenants-in-
common with 39% and 61% interests, respectively. In December 1994, the
United States Bankruptcy Court approved the termination of New Valley
Corporation's ("New Valley") lease for the property at which time New
Valley vacated the property.
The Partnership and CPA(R):3 are in the process of finalizing a net lease
agreement with Excel Telecommunications, Inc. ("Excel") for the Reno
property. The lease is expected to provide for an initial term of ten
years followed by lessee options for two five-year renewal terms. Annual
rent during the first five lease years is expected to be $532,800 (of which
the Partnership's share would be $207,800) increasing to $580,800 (of which
the Partnership's share would be $226,800), thereafter. Excel will have
the right to terminate the lease at the end of the sixth lease year.
The Partnership and CPA(R):3 are committed to provide Excel with an
allowance of up to approximately $1,400,000 (of which the Partnership's
share would be $546,000) which would allow Excel to retrofit the facility
to its specifications. The Partnership and CPA(R):3 will be obligated to
maintain and repair the roof; however, if the roof is replaced, Excel will
assume the maintenance and repair obligation subsequent to any roof
replacement.
Note 8. Debt Refinancing:
----------------
Unisource
---------
On June 11, 1996, the Partnership paid off an existing mortgage loan of
$5,539,072 collateralized by the Partnership's property leased to Unisource
Worldwide, Inc. ("Unisource") which had matured by obtaining new limited
recourse mortgage debt collateralized by the property. The new loan of
$7,000,000 provides for quarterly installments of principal and interest of
$202,000 at an annual interest rate of 7.24%. In May 2006, the loan will
reset to a rate indexed to United States Treasury Yield Percentage. The
loan agreement provides that if at any time during the term of the loan
Unisource is no longer a subsidiary of Alco Standard Corporation and
---
Unisource's senior unsecured debt receives a rating below BBB- by Standard
& Poor's Corporation or Baa3 by Moody's Investors Service, Inc., the
interest rate on the loan will increase by 1.00%. The loan matures in
February 2010 at which time the loan will fully amortize.
The matured loan provided for quarterly payments of principal and interest
of $278,313 at an annual interest rate of 10%. Solely as a result of
refinancing the debt on the Unisource property, annual cash flow will
increase by approximately $305,000.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
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Results of Operations:
---------------------
The Partnership's net income decreased slightly for the three-month and
six-month periods ended June 30, 1996 by $41,000 and $27,000 respectively
as compared with the similar periods ended June 30, 1995. The results for
the six-month period ended June 30, 1995 benefited from nonrecurring other
income of $50,244 item. Cash flow from operations for the current six-
month period reflected an increase of 16%. A decrease in lease revenues
was partially offset by a decrease in interest expense and to a lesser
extent, property expenses. Lease revenues decreased as a result of the
November 1995 restructuring of the Gibson Greetings, Inc. ("Gibson") lease
which included the severing of a property from the Gibson master lease and
leasing of the severed property to Cleo, Inc. ("Cleo"). As more fully
described on the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1995, operating cash flow was not significantly changed
by the restructuring which included paying off the Gibson mortgage loan.
In addition, the Partnership was able to benefit from the restructuring by
being able to extend the lease term beyond 2002, the original expiration of
the initial term of the Gibson lease. In addition to paying off the Gibson
loan, the payoff of three other mortgages in the first quarter of 1995 and
the continuing amortization of other mortgage loans contributed to the
decrease in interest expense. As a result of the refinancing of the
Unisource Worldwide, Inc. ("Unisource") property mortgage loan, interest
expense is expected to further decrease, and, solely as a result of the
refinancing, annual cash flow will increase by $305,000. In addition, if
the lease agreement with Excel Telecommunications, Inc. ("Excel") for the
Partnership's vacant property in Reno, Nevada is executed, annual revenues
would be expected to increase by $208,000 at such time as the property is
ready for occupancy by the lessee. Because the Excel rents will not
commence until retrofitting of the new facility is completed, the effect on
1996 cash flow is not expected to be significant.
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 approximately $400,000. Cash flow from operating
activities of $1,385,000 was sufficient to pay quarterly distributions to
partners of $775,000 and scheduled principal payment installments of
$519,000. In addition, the Partnership was able to pay a special
distribution of $824,000 ($15 per Limited Partnership Unit) in April 1996.
The special distribution was funded by increasing the Partnership's note
payable to an affiliate by $1,000,000. The note payable was paid off using
the excess proceeds obtained on the refinancing of the Unisource mortgage
loan. As a result of the improved credit rating of Unisource, a subsidiary
of Alco Standard Corporation, the Partnership was able to pay a matured
loan of $5,540,000 and obtain $7,000,000 of new limited recourse mortgage
financing while substantially reducing annual debt service on the Unisource
property. Currently, the Partnership has two mortgage loans outstanding;
the Unisource loan which will fully amortize in 2010 and the mortgage loan
on the PreFinish Metals Incorporated property which will fully amortize in
July 1998. Accordingly, the Partnership has significant borrowing
capacity; however, it currently has no plans to mortgage or finance any of
its unleveraged properties. The Partnership is committed to fund
approximately $550,000 of improvements at the Reno property to enable Excel
to retrofit the facility to its specifications. The Partnership currently
intends to fund this commitment from its cash reserves.
The Partnership is currently pursuing its remedies against Sports &
Recreation, Inc. ("Sports & Recreation") due to Sports & Recreation's
default under its lease for a property in Moorestown, New Jersey. Although
Sports & Recreation has offered a cash settlement to terminate the lease,
the Partnership has rejected such offer as inadequate and has proposed a
counter-offer to Sports & Recreation. There is no assurance that this
dispute will be resolved soon.
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CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART II
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Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended June 30, 1996, the Partnership was not
required to file any reports on Form 8-K.
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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.
8/8/96 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
8/8/96 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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