<PAGE>
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 SEPTEMBER 30, 1995
ended ---------------------------------------------------
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
-------------------------------
(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
- - ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 492-1100
---------------
(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.
Yes [X] 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 [_]
<PAGE>
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
September 30, 1995 2
Statements of Income for the three and nine
months ended September 30, 1994 and 1995 3
Statements of Cash Flows for the nine
months ended September 30, 1994 and 1995 4
Notes to Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7-8
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.
- 1 -
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
PART I
------
Item 1. - FINANCIAL INFORMATION
-------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
1994 1995
------------- --------------
(Note) (UNAUDITED)
<S> <C> <C>
ASSETS:
Land and buildings, net of
accumulated depreciation of
$4,831,468 at December 31, 1994 and $12,567,627 $12,180,270
$5,225,675 at September 30, 1995
Net investment in direct
financing leases 23,265,769 23,283,395
Cash and cash equivalents 4,185,923 3,046,321
Accrued interest and rents receivable 461,360 467,328
Other assets 90,063 104,259
----------- -----------
Total assets $40,570,742 $39,081,573
=========== ===========
LIABILITIES:
Mortgage notes payable $15,757,586 $13,756,146
Accrued interest payable 182,839 164,825
Accounts payable and accrued expenses 249,991 45,261
Prepaid rental income and security deposits 316,677 282,800
Accounts payable to affiliates 53,037 58,273
----------- -----------
Total liabilities 16,560,130 14,307,305
----------- -----------
PARTNERS' CAPITAL:
General Partners 185,844 193,771
Limited Partners (55,000 and 54,900 Limited
Partnership Units issued and outstanding at
December 31, 1994 and September 30, 1995) 23,824,768 24,580,497
----------- -----------
Total partners' capital 24,010,612 24,774,268
----------- -----------
Total liabilities and
partners' capital $40,570,742 $39,081,573
=========== ===========
</TABLE>
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.
- 2 -
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1994 SEPTEMBER 30, 1995 September 30, 1994 SEPTEMBER 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases $ 361,191 $ 441,454 $1,148,497 $1,281,476
Interest from direct
financing leases 859,462 818,112 2,578,495 2,450,670
Other interest income 48,403 45,242 128,145 146,132
Other income 1,825 24,397 50,244
Gain on sale of real estate 23,451
---------- ---------- ---------- ----------
1,270,881 1,304,808 3,902,985 3,928,522
---------- ---------- ---------- ----------
Expenses:
Interest on mortgages 396,023 347,376 1,203,906 1,088,585
Depreciation 125,415 129,245 376,243 394,207
General and administrative 72,489 89,513 206,061 223,477
Property expense 220,067 46,898 505,586 304,992
Amortization 4,299 4,299 12,896 12,896
---------- ---------- ---------- ----------
818,293 617,331 2,304,692 2,024,157
---------- ---------- ---------- ----------
Net income $ 452,588 $ 687,477 $1,598,293 $1,904,365
========== ========== ========== ==========
Net income allocated
to General Partners $ 4,526 $ 6,875 $ 15,983 $ 19,044
========== ========== ========== ==========
Net income allocated
to Limited Partners $ 448,062 $ 680,602 $1,582,310 $1,885,321
========== ========== ========== ==========
Net income per weighted
average Unit
(55,000 weighted
average Limited
Partnership Units) $8.15 $12.38 $28.77 $34.28
===== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 3 -
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,598,293 $1,904,365
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 389,139 407,103
Other noncash items (11,758) (17,626)
Gain on sale of real estate (23,451)
Net change in operating assets and liabilities 117,578 (284,445)
---------- ----------
Net cash provided by operating activities 2,069,801 2,009,397
---------- ----------
Cash flows from investing activities:
Proceeds from sale of real estate 124,615
Additional capitalized costs (6,850)
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Net cash provided by (used in) investing activities 124,615 (6,850)
---------- ----------
Cash flows from financing activities:
Distributions to partners (1,093,333) (1,111,667)
Retirement of Limited Partner Units (29,042)
Prepayment of mortgage notes payable (852,003)
Payments on mortgage principal (1,198,110) (1,149,437)
---------- ----------
Net cash used in financing activities (2,291,443) (3,142,149)
---------- ----------
Net decrease in cash
and cash equivalents (97,027) (1,139,602)
Cash and cash equivalents, beginning of period 4,367,127 4,185,923
------------ -----------
Cash and cash equivalents, end of period $ 4,270,100 $ 3,046,321
============ ===========
Supplemental disclosure of cash flows information:
Interest paid $ 1,212,617 $ 1,106,599
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 4 -
<PAGE>
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,
1994.
Note 2. Distributions to Partners:
-------------------------
Distributions declared and paid to partners during the nine months ended
September 30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
- - ------------- ---------------- ---------------- ------------------------
<S> <C> <C> <C>
December 31, 1994 $3,667 $363,000 $6.60
====== ======== =====
March 31, 1995 $3,700 $366,300 $6.66
====== ======== =====
June 30, 1995 $3,750 $371,250 $6.75
====== ======== =====
</TABLE>
A distribution of $6.84 per Limited Partner Unit for the quarter ended
September 30, 1995 was declared and paid in October 1995.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month and nine-month periods ended September 30, 1994, the
Partnership incurred management fees of $21,236 and $58,947, respectively,
and general and administrative expense reimbursements of $13,746 and
$44,110, respectively, payable to an affiliate. 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.
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, 1994 and 1995 were $28,459 and $39,735,
respectively.
- 5 -
<PAGE>
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, 1994 and 1995, the Partnership earned its total operating
revenues (rental income plus interest income from financing leases) from
the following lease obligors:
<TABLE>
<CAPTION>
1994 % 1995 %
---------- ---- ---------- ----
<S> <C> <C> <C> <C>
Gibson Greetings, Inc. $1,385,784 37% $1,385,784 37%
Unisource Worldwide, Inc. 985,680 27 987,506 27
Pre Finish Metals Incorporated 662,442 18 703,178 18
AT&T 221,544 6 221,768 6
New Valley Corporation 307,782 8 177,906 5
Maybelline Products, Inc. 104,000 3
Other 163,760 4 95,069 3
A-Pak Packaging, Inc. 56,935 1
---------- --- ---------- ---
$3,726,992 100% $3,732,146 100%
========== === ========== ===
</TABLE>
- 6 -
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Results of Operations:
---------------------
Net income increased by $235,000 and $306,000 for the three-month and
nine-month periods ended September 30, 1995, respectively, as compared with
the three-month and nine-month periods ended September 30, 1994. Net
income for the comparable three-month periods increased as the result of an
increase in lease revenues and decreases in interest and property expenses.
The increase in lease revenues was primarily due to the leasing of the
Maumelle, Arkansas distribution facility earlier in 1995 to Maybelline
Products Co., Inc. ("Maybelline") and A-Pak Packaging, Inc. ("A-Pak").
These two tenants generated approximately $72,000 of net lease revenues
during the three-month period ended September 30, 1995. The Maumelle
property was vacant during the same period in 1994. The increases from
Maybelline and A-Pak were partially offset by the loss of rent from a
property in Reno, Nevada which the Partnership continues to actively
remarket since the termination of the lease for that property by New Valley
Corporation ("New Valley") in December 1994. The decrease in interest
expense was due to the payoff of three mortgage loans totaling $852,000 in
the first quarter of 1995 and the continuing amortization of the
Partnership's three remaining nonrecourse mortgage loan obligations. The
decrease in property costs was due to the costs incurred in 1994 in
connection with the assessment of the Partnership's liquidity alternatives
and carrying costs related to the Maumelle facility. The Partnership is
now incurring carrying costs on the Reno property for real estate taxes,
insurance and maintenance which had previously been a lease obligation of
New Valley.
Net income for the comparable nine-month periods increased as the
result of decreases in interest and property expenses. The decrease in
interest expense was partially due to the payoff of the three mortgage
loans. During the current nine-month period, mortgage balances on the
remaining loans decreased by approximately 8% with the corresponding
interest obligation on such remaining loans decreasing. It is expected
that the Partnership's interest expense will continue to decrease as the
Partnership's debt continues to amortize. Lease revenues were relatively
stable as increased rentals resulting from the above-mentioned execution of
leases with Maybelline and A-Pak and increases in Pre Finish Metals
Incorporated ("Pre Finish") rent fully offset the decrease in rentals from
New Valley resulting from the termination of the Reno lease. Revenue from
the Pre Finish lease increased due to a direct pass through of higher debt
service payments on the related loan. Increases in debt service on the Pre
Finish mortgage loan were due to increasing principal payments. The
Partnership realized income from nonrecurring sources in both 1994 and
1995. As the amounts earned were similar for both 1995 and 1994, such
nonrecurring income had no significant impact on the comparability of
operating results.
In April 1995, the Partnership and Corporate Property Associates 3
("CPA(R):3"), an affiliate, which own as tenants-in-common a property in
Moorestown, New Jersey formerly leased to New Valley entered into a lease
with Sports & Recreation, Inc. ("Sports & Recreation") for the Moorestown
property. The Sports & Recreation lease provides for a feasibility period
which has been extended to December 31, 1995. Sports & Recreation is
continuing to apply for the necessary regulatory approvals and is in the
process of obtaining construction bids for the retrofitting of the property
for conversion to a retail store. If the necessary approvals are
ultimately received, the Partnership would initially receive annual rentals
of approximately $121,000. If retrofitting proceeds, the Partnership and
CPA(R):3 have an obligation to reimburse Sports & Recreation for the cost
of replacing the heating, ventilation and air conditioning systems and
installing a new roof and drainage system. There is no assurance that
Sports & Recreation will exercise its option to lease the property at the
end of the feasibility period. If such option is exercised, the initial
term of the lease will be sixteen years.
- 7 -
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
----------------------------------------------------------
Financial Condition:
-------------------
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 $3,046,000 and cash provided from operating activities will
be sufficient to meet the Partnership's cash requirements which consist of
paying quarterly distributions and meeting scheduled mortgage principal
payments. Cash from operating activities of $2,009,000 was sufficient to
fund quarterly distributions to partners of $1,112,000 and $897,000 of
scheduled mortgage principal payments. During the first quarter of 1995,
the Partnership satisfied its obligations on three mortgage loans by using
$852,000 of its cash reserves to prepay these loans. Because the rates of
interest on mortgage obligations is greater than the rates of interest
available for short-term money market instruments, Management believes that
it is appropriate for the Partnership to use a portion of cash reserves to
prepay mortgages from time to time or to pay a portion of scheduled
principal payment requirements. As a result of the terminations of the
Reno and Moorestown leases in December 1994 and May 1993, respectively,
pursuant to New Valley's bankruptcy petition, the Partnership anticipates
that it will ultimately receive a cash settlement of its claim against New
Valley. However, the amount of such payment is still being negotiated and
is subject to approval by the bankruptcy court, even though New Valley's
reorganization has been approved. To the extent that Sports & Recreation
commences retrofitting the Moorestown property, the Partnership will have a
commitment to reimburse certain costs as described above. Although the
amount of such reimbursement has not yet been determined, Management
believes that its share of such reimbursement can be funded from existing
cash reserves.
The Partnership and CPA(R):3 own three properties as tenants-in-common
which are leased to Gibson Greetings, Inc. ("Gibson") pursuant to a master
lease. In connection with Gibson's proposed sale of a subsidiary, Gibson
has entered into negotiations with the Partnership and CPA(R):3 to sever a
property in Memphis, Tennessee from the master lease. Under a current
proposal, Gibson would make a lump sum payment of $12,200,000 to the
Partnership and CPA(R):3 (of which the Partnership's share is expected to
be $3,477,000) in exchange for agreeing to modify the master lease and
releasing Gibson from its lease obligation on the Memphis property.
Under the proposed lease modification, Gibson would continue to lease the
properties in Cincinnati, Ohio and Berea, Kentucky with the initial term
extended from January 2002 to November 2013. The annual rent would
initially be $3,100,000 (of which the Partnership's share is expected to be
approximately $733,000) with scheduled rent increases of 20% every five
years. Gibson would also be granted options to purchase its leased
properties with such options exercisable in 2005 and 2010. In addition,
the company which is negotiating to purchase the Gibson subsidiary has
agreed in principle to enter into a ten year lease with the Partnership and
CPA(R):3 for the Memphis property at an annual rental of $1,500,000 (of
which the Partnership's share is expected to be approximately $355,000).
The Partnership's share of annual rentals under the existing lease on the
three properties is $1,848,000. The Partnership and CPA(R):3 currently
plan to use the lump sum payment to payoff the mortgage loan on the Gibson
properties which of which the Partnership's share of the outstanding
balance is currently $6,153,000. It is anticipated that the Partnership
will use its share of the lump sum payment and a portion of its cash
reserves to payoff its share of the Gibson mortgage loan. There is no
assurance that the proposed transaction will be completed. The proposed
transaction is not expected to have any current impact on the Partnership's
distribution rate.
- 8 -
<PAGE>
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, 1995, the Partnership was not
required to file any reports on Form 8-K.
- 9 -
<PAGE>
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.
11/10/95 By: /s/ Claude Fernandez
-------------- ------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
11/10/95 By: /s/ Michael D. Roberts
-------------- -------------------------------
Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
- 10 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 3046321
<SECURITIES> 0
<RECEIVABLES> 467328
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 104259
<PP&E> 40689340
<DEPRECIATION> 5225675
<TOTAL-ASSETS> 39081573
<CURRENT-LIABILITIES> 551159
<BONDS> 13756146
<COMMON> 0
0
0
<OTHER-SE> 24774268
<TOTAL-LIABILITY-AND-EQUITY> 39081573
<SALES> 0
<TOTAL-REVENUES> 3928522
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 528469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1088585
<INCOME-PRETAX> 1904365
<INCOME-TAX> 0
<INCOME-CONTINUING> 1904365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1904365
<EPS-PRIMARY> 34.28
<EPS-DILUTED> 34.28
</TABLE>
