<PAGE>
OMB APPROVAL
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OMB Number 3235-0070
Expires October 31, 1995
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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, 1995
-------------------------------------------------
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
---------------------------------------------------------
CORPORATE PROPERTY ASSOCIATES 2
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 13-3022196
--------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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.
[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
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
INDEX
Page No.
--------
PART I
------
Item 1. - Financial Information*
Balance Sheets, December 31, 1994 and
June 30, 1995 2
Statements of Income for the three and six
months ended June 30, 1994 and 1995 3
Statements of Cash Flows for the six
months ended June 30, 1994 and 1995 4
Notes to Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7-8
PART II
-------
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, June 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
$5,096,430 at June 30, 1995 $12,567,627 $12,302,665
Net investment in direct
financing leases 23,265,769 23,283,147
Cash and cash equivalents 4,185,923 3,018,659
Accrued interest and rents receivable 461,360 475,582
Other assets 90,063 81,748
----------- -----------
Total assets $40,570,742 $39,161,801
=========== ===========
LIABILITIES:
Mortgage notes payable $15,757,586 $14,132,711
Accrued interest payable 182,839 168,573
Accounts payable and accrued expenses 249,991 46,615
Prepaid rental income and security
deposits 316,677 282,800
Accounts payable to affiliates 53,037 40,269
----------- -----------
Total liabilities 16,560,130 14,670,968
----------- -----------
PARTNERS' CAPITAL:
General Partners 185,844 190,646
Limited Partners (55,000 Limited
Partnership Units issued and
outstanding) 23,824,768 24,300,187
----------- -----------
Total partners' capital 24,010,612 24,490,833
----------- -----------
Total liabilities and
partners' capital $40,570,742 $39,161,801
=========== ===========
</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 Six Months Ended
June 30, 1994 June 30, 1995 June 30, 1994 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases $ 355,424 $ 432,515 $ 787,306 $ 840,022
Interest income from
direct financing leases 859,499 816,275 1,719,033 1,632,558
Other interest income 43,326 46,151 79,742 100,890
Other income 22,572 50,244
Gain on sale of real estate 23,451
---------- ---------- ---------- ----------
1,258,249 1,294,941 2,632,104 2,623,714
---------- ---------- ---------- ----------
Expenses:
Interest on mortgages 401,754 356,969 807,883 741,209
Depreciation 125,414 132,481 250,828 264,962
General and administrative 65,586 61,723 133,572 133,964
Property expense 200,113 106,152 285,519 258,094
Amortization 4,299 4,299 8,597 8,597
---------- ---------- ---------- ----------
797,166 661,624 1,486,399 1,406,826
---------- ---------- ---------- ----------
Net income $ 461,083 $ 633,317 $1,145,705 $1,216,888
========== ========== ========== ==========
Net income allocated
to General Partners $ 4,611 $ 6,333 $ 11,457 $ 12,169
========== ========== ========== ==========
Net income allocated
to Limited Partners $ 456,472 $ 626,984 $1,134,248 $1,204,719
========== ========== ========== ==========
Net income per Unit
(55,000 Limited
Partnership Units) $8.30 $11.40 $20.62 $21.90
========== ========== ========== ==========
</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>
Six Months Ended
June 30,
----------------------------
1994 1995
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,145,705 $ 1,216,888
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 259,425 273,559
Other noncash items (7,874) (17,378)
Gain on sale of real estate (23,451)
Net change in operating assets and liabilities 41,303 (278,791)
----------- -----------
Net cash provided by operating activities 1,415,108 1,194,278
----------- -----------
Cash flows from investing activities:
Proceeds from sale of real estate 124,615
-----------
Net cash provided by investing activities 124,615
-----------
Cash flows from financing activities:
Distributions to partners (728,333) (736,667)
Prepayment of mortgage notes payable (852,003)
Payments on mortgage principal (788,911) (772,872)
----------- -----------
Net cash used by financing activities (1,517,244) (2,361,542)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 22,479 (1,167,264)
Cash and cash equivalents, beginning of period 4,367,127 4,185,923
----------- -----------
Cash and cash equivalents, end of period $ 4,389,606 $ 3,018,659
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 813,342 $ 755,475
=========== ===========
</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 six months ended June 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
====== ======== =====
</TABLE>
A distribution of $6.75 per Limited Partner Unit for the quarter ended June 30,
1995 was declared and paid in July 1995.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month and six-month periods ended June 30, 1994, the Partnership
incurred management fees of $16,434 and $37,711, respectively, and general and
administrative expense reimbursements of $14,968 and $30,364, respectively,
payable to an affiliate. 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.
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, 1994 and 1995 were $22,199 and $28,846, 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 six-month periods ended June 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. $ 923,856 37% $ 923,856 37%
Unisource Worldwide, Inc. 657,120 26 657,120 26
Pre Finish Metals Incorporated 436,730 18 468,448 19
AT&T Corporation 147,678 6 147,819 6
New Valley Corporation 205,242 8 118,626 5
Other 135,713 5 68,776 3
Maybelline Products Co., Inc. 65,000 3
A-Pak Packaging, Inc. 22,935 1
---------- --- ---------- ---
$2,506,339 100% $2,472,580 100%
========== === ========== ===
</TABLE>
Note 5. Property in Moorestown, New Jersey:
----------------------------------
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 replacing 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. Sports & Recreation has not
yet indicated whether it will extend the lease beyond the feasibility period,
and there is no assurance that the lease will extend beyond the feasibility
period.
-6-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Results of Operations
---------------------
Net income increased by $172,000 and $71,000 for the three-month and
six-month periods ended June 30, 1995, respectively, as compared with the three-
month and six-month periods ended June 30, 1994. Net income for the comparable
three-month periods increased as the result of an increase in leasing revenues,
a decease in interest expense and a decrease in property expenses. The increase
in leasing revenue is primarily due to the leasing of the Maumelle, Arkansas
distribution facility in 1995 to Maybelline Products Co., Inc. ("Maybelline")
and A-Pak Packaging, Inc. ("A-Pak"). These two tenants generated approximately
$62,000 of revenue in the three-month period ended June 30, 1995. The Maumelle
property was vacant during the same period in 1994. In addition, rentals from
Pre Finish Metals Incorporated ("Pre Finish") increased, as the result of a rent
provision which passes through changes in debt service on a variable rate debt
service obligation as a rent adjustment to Pre Finish. These increases in
rentals offset the loss of rent which resulted from the termination of the New
Valley Corporation ("New Valley") lease on a property in Reno, Nevada in
December 1994. The decrease in interest expense was due to the payoff of three
mortgage loans in the first quarter of 1995 and the continuing amortization of
the Partnership's mortgage loans. The decrease in property expense is due to the
higher costs incurred in 1994 in connection with the assessment of liquidity
alternatives and costs related to the Maumelle facility which was vacant during
the comparable three-month period in 1994. The Partnership, however, is now
incurring carrying costs for items such as real estate taxes, insurance and
maintenance on the Reno property.
Net income for the comparable six-month periods increased as the result
of decreases in interest and property expenses, as discussed above, and an
increase in other interest income. This was partially offset by a modest
decrease in leasing revenues. The decrease in property expense for the six-month
period are not as pronounced for the comparable six-month periods as the
Partnership incurred carrying costs on the Maumelle property during the first
quarter of 1995 and also incurred costs related to executing the Maybelline and
A-Pak leases. Other interest income increased due to higher interest rates on
short-term cash equivalents; however, such rates have moderated in the first
quarter of 1995. The decrease in leasing revenues was due to the New Valley
lease termination which was not fully offset by the rentals from the Maumelle
facility. As Maumelle was leased during the first quarter of 1994, rentals were
only $10,000 higher in the six-month period ended 1995 than the rentals from the
facility for the six-month period ended June 30, 1994. Rentals from Maumelle
will be higher for the full year, as Maumelle was unleased during the entire
second half of 1994. The Partnership realized income from nonrecurring sources
in both 1994 and 1995. As the amounts earned from nonrecurring sources were
similar, such nonrecurring income had no significant impact on the comparability
of earnings.
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
$3,019,000 and cash provided from operating activities will be sufficient to
meet the Partnership's cash requirements which currently consists solely of
paying quarterly distributions and meeting scheduled mortgage principal
payments. Cash flows from operating activities were sufficient to fund payment
of quarterly distributions and $450,000 of $773,000 of scheduled mortgage
principal payments. During the first quarter, the Partnership satisfied its
obligations on three
-7-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
----------------------------------------------------------
Financial Condition, continued
------------------------------
mortgage loans by using $852,003 of its cash reserves to prepay these loans. As
a result of these prepayments, annual debt service will decrease by $359,000.
Management determined it was prudent to reduce cash balances by prepaying debt
which bear higher interest rates than the rate of interest that could be earned
by cash invested in money market instruments. To the extent that Sports &
Recreation, Inc. is able to meet the conditions necessary to retrofit the
Moorestown property for 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 still in the
process of being determined, Management believes that such costs can be funded
from existing cash reserves, if necessary. As the Moorestown property is
unencumbered by mortgage debt, the Partnership would have the option of using
debt financing to fund improvements; however, the Partnership does not currently
intend to pursue any additional debt financing. 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 voluntary bankruptcy
petition, 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, even though New Valley's reorganization has been approved by the
bankruptcy court.
-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 June 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.
08/9/95 By: /s/ Claude Fernandez
------------- ------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
08/9/95 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 SIX MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 3,018,659
<SECURITIES> 0
<RECEIVABLES> 475,582
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,748
<PP&E> 40,682,242
<DEPRECIATION> 5,096,430
<TOTAL-ASSETS> 39,161,801
<CURRENT-LIABILITIES> 538,257
<BONDS> 14,132,711
<COMMON> 0
0
0
<OTHER-SE> 24,490,833
<TOTAL-LIABILITY-AND-EQUITY> 39,161,801
<SALES> 0
<TOTAL-REVENUES> 2,623,714
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 665,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 741,209
<INCOME-PRETAX> 1,216,888
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,216,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,216,888
<EPS-PRIMARY> 21.90
<EPS-DILUTED> 21.90
</TABLE>
