<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended DECEMBER 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-9727
CORPORATE PROPERTY ASSOCIATES 2
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 13-3022196
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (212) 492-1100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP UNITS
(Title of Class)
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of
Registrant: There is no active market for Limited Partnership Units.
<PAGE> 2
Part II
Item 8. Consolidated Financial Statements and Supplementary Data.
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 1995 and 1996.
(iii) Consolidated Statements of Income for the years ended December 31,
1994, 1995 and 1996.
(iv) Consolidated Statements of Partners' Capital for the years ended
December 31, 1994, 1995 and 1996.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996.
(vi) Notes to Consolidated Financial Statements.
-6-
<PAGE> 3
REPORT of INDEPENDENT ACCOUNTANTS
To the Partners of
Corporate Property Associates 2
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Corporate Property Associates 2 (a California limited partnership) and
Subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of income, partners' capital and cash flows for each of the three
years in the period ended December 31, 1996. We have also audited the financial
statement schedule included on pages 17 to 19 of this Annual Report. These
financial statements and financial statement schedule are the responsibility of
the General Partners. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partners, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Corporate Property Associates 2 (a California limited partnership) and
Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the Schedule of Real Estate and
Accumulated Depreciation as of December 31, 1996, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the financial information required to be included therein
pursuant to Securities and Exchange Commission Regulation S-X Rule 12-28.
/s/ Coopers & Lybrand L.L.P.
New York, New York
March 17, 1997
-5-
<PAGE> 4
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
ASSETS:
Real estate leased to others:
Accounted for under the
operating method:
Land $ 4,850,433 $ 4,850,433
Buildings 12,555,513 12,756,321
------------ ------------
17,405,946 17,606,754
Accumulated depreciation 5,351,359 5,850,679
------------ ------------
12,054,587 11,756,075
Net investment in direct financing leases 20,060,127 20,259,530
------------ ------------
Real estate leased to others 32,114,714 32,015,605
Cash and cash equivalents 577,506 1,066,861
Accrued interest and rents receivable, net of
reserve for uncollected rents of $22,660 in 1995 348,201 360,786
Other assets, net of accumulated amortization of
$83,725 in 1995 and $3,571 in 1996 82,862 239,271
------------ ------------
Total assets $ 33,123,283 $ 33,682,523
============ ============
LIABILITIES:
Mortgage notes payable $ 7,262,720 $ 7,787,061
Note payable to affiliate 250,000
Accrued interest payable 109,632 75,233
Accounts payable and accrued expenses 74,884 66,050
Accounts payable to affiliates 57,263 63,447
Security deposits 282,800 283,694
------------ ------------
Total liabilities 8,037,299 8,275,485
------------ ------------
Commitments and contingencies
PARTNERS' CAPITAL:
General Partners 196,888 208,334
Limited Partners (54,900 Limited Partnership
Units issued and outstanding at
December 31, 1995 and 1996) 24,889,096 25,198,704
------------ ------------
Total partners' capital 25,085,984 25,407,038
------------ ------------
Total liabilities and
partners' capital $ 33,123,283 $ 33,682,523
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
<PAGE> 5
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of INCOME
For the years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income $1,513,091 $1,717,457 $1,850,494
Interest income from direct financing leases 3,437,921 3,174,996 2,688,154
Other interest income 186,038 170,631 46,177
Other income 24,397 122,720 6,138
---------- ---------- ----------
5,161,447 5,185,804 4,590,963
---------- ---------- ----------
Expenses:
Interest 1,593,880 1,351,797 731,843
Depreciation 501,657 519,891 499,320
General and administrative 276,283 298,974 274,126
Property expense 618,277 402,928 454,044
Amortization 17,195 16,133 6,848
Writedown to net realizable value 445,551
---------- ---------- ----------
3,452,843 2,589,723 1,966,181
---------- ---------- ----------
Income before gain on sale of real
estate 1,708,604 2,596,081 2,624,782
Gain on sale of real estate 23,451
---------- ---------- ----------
Net income $1,732,055 $2,596,081 $2,624,782
========== ========== ==========
Net income allocated to:
Individual General Partner $ 1,732 $ 2,596 $ 2,625
========== ========== ==========
Corporate General Partner $ 15,589 $ 23,365 $ 23,623
========== ========== ==========
Limited Partners $1,714,734 $2,570,120 $2,598,534
========== ========== ==========
Net income per Unit:
(55,000 Limited Partnership Units
in 1994, 54,975 weighted average
Limited Partnership Units in 1995 and
54,900 Limited Partnership Units in 1996) $ 31.18 $ 46.75 $ 47.33
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
<PAGE> 6
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Partners' Capital Accounts
---------------------------------------------------------------
Limited
Partners'
General Limited Amount Per
Total Partners Partners Unit (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 23,737,447 $ 183,113 $ 23,554,334 $ 428
Distributions (1,458,890) (14,590) (1,444,300) (26)
Net income, 1994 1,732,055 17,321 1,714,734 32
------------ ------------ ------------ ------------
Balance, December 31, 1994 24,010,612 185,844 23,824,768 434
Repurchase of Limited Partner Units (29,042) (29,042)
Distributions (1,491,667) (14,917) (1,476,750) (27)
Net income, 1995 2,596,081 25,961 2,570,120 47
------------ ------------ ------------ ------------
Balance, December 31, 1995 25,085,984 196,888 24,889,096 454
Distributions (2,303,728) (14,802) (2,288,926) (42)
Net income, 1996 2,624,782 26,248 2,598,534 47
------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 25,407,038 $ 208,334 $ 25,198,704 $ 459
============ ============ ============ ============
</TABLE>
(a) Based on the weighted average Units issued and outstanding during all
periods.
The accompanying notes are an integral part of the consolidated financial
statements.
-8-
<PAGE> 7
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,732,055 $ 2,596,081 $ 2,624,782
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 518,852 536,024 506,168
Cash receipts on direct financing leases less
than amortization of unearned income (15,604) (32,043) (199,403)
Writedown to net realizable value 445,551
Restructuring fees received, net of costs 3,237,685
Gain on sale of real estate (23,451)
Net change in operating assets and liabilities 113,132 (173,738) (139,675)
----------- ----------- -----------
Net cash provided by operating
activities 2,770,535 6,164,009 2,791,872
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of real estate 124,615
Additional capitalized costs (6,851) (200,808)
----------- ----------- -----------
Net cash provided by (used in)
investing activities 124,615 (6,851) (200,808)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to partners (1,458,890) (1,491,667) (2,303,728)
Repurchase of Limited Partner Units (29,042)
Proceeds from note payable to affiliate 250,000 1,000,000
Payment of note payable to affiliate (1,250,000)
Payments of mortgage principal (1,617,464) (1,489,763) (936,587)
Proceeds from mortgages 7,000,000
Prepayments of mortgage payable (7,005,103) (5,539,072)
Deferred financing costs (72,322)
----------- ----------- -----------
Net cash used in
financing activities (3,076,354) (9,765,575) (2,101,709)
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (181,204) (3,608,417) 489,355
Cash and cash equivalents, beginning of year 4,367,127 4,185,923 577,506
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,185,923 $ 577,506 $ 1,066,861
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-9-
<PAGE> 8
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of Corporate
Property Associates 2 and its wholly-owned subsidiaries
(collectively, the "Partnership").
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the tenant
is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance, repairs,
renewals and improvements.
The Partnership diversifies its real estate investments among various
corporate tenants engaged in different industries and by property
type throughout the United States.
The leases are accounted for under either the direct financing or
operating methods. Such methods are described below:
Direct financing method - Leases accounted for under the direct
financing method are recorded at their net investment (Note 5).
Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return
on the Partnership's net investment in the lease.
Operating method - Real estate is recorded at cost, revenue is
recognized as rentals are earned and expenses (including
depreciation) are charged to operations as incurred.
The Partnership assesses the recoverability of its real estate assets,
including residual interests, based on projections of undiscounted
cash flows over the life of such assets. In the event that such cash
flows are insufficient, the assets are adjusted to their estimated
net realizable value.
Substantially all of the Partnership's leases provide for either
scheduled rent increases, periodic rent increases based on formulas
indexed to increases in the Consumer Price Index or sales overrides.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of components of the particular properties,
which range from 5 to 35 years.
Cash Equivalents:
The Partnership considers all short-term, highly-liquid investments that
are both readily convertible to cash and have a maturity of generally
three months or less at the time of purchase to be cash equivalents.
Items classified as cash equivalents include commercial paper and
money market funds. Substantially all of the Partnership's cash and
cash equivalents at December 31, 1995 and 1996 were held in the
custody of two financial institutions.
Continued
-10-
<PAGE> 9
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Other Assets:
Included in other assets are deferred charges which are costs incurred
in connection with mortgage note refinancing and are amortized on a
straight-line basis over the terms of the mortgages.
Income Taxes:
A partnership is not liable for Federal income taxes as each partner
recognizes his proportionate share of the partnership income or loss
in his tax return. Accordingly, no provision for income taxes is
recognized for financial statement purposes.
2. Partnership Agreement:
The Partnership was organized on August 9, 1979 under the Uniform
Limited Partnership Act of the State of California for the purpose of
engaging in the business of investing in and leasing industrial and
commercial real estate. The Corporate General Partner purchased 200
Limited Partnership Units in connection with the Partnership's public
offering. The Partnership will terminate on December 31, 2017, or
sooner, in accordance with the terms of the Amended Agreement of
Limited Partnership (the "Agreement").
The Agreement provides that the General Partners are allocated 1% (1/10
of 1% to the Individual General Partner, William P. Carey, and 9/10
of 1% to the Corporate General Partner, W. P. Carey & Co., Inc.
("W.P. Carey")) and the Limited Partners are allocated 99% of the
profits and losses as well as distributions of distributable cash
from operations, as defined. The partners are also entitled to
receive net proceeds from the sale of the Partnership properties as
defined in the Agreement. The General Partners may be entitled to
receive a subordinated preferred return, measured based upon the
cumulative proceeds arising from the sale of Partnership assets.
Pursuant to the subordination provisions of the Agreement, the
preferred return may be paid only after the limited partners receive
100% of their initial investment from the proceeds of asset sales and
a cumulative annual return ranging from 6% to 9% since the inception
of the Partnership. The General Partners interest in such preferred
return amounts to $1,048,845 based upon the cumulative proceeds from
the sale of assets since the inception of the Partnership through
December 31, 1996. The Partnership's ability to satisfy the
subordination provisions of the Agreement may not be determinable
until liquidation of a substantial portion of the Partnership's
assets has been made, formal plans of liquidation are adopted or
limited partnership units are converted to other securities which
provide the security holder with greater liquidity than a limited
partnership unit. Management believes that as of the report date,
ultimate payment of the preferred return is reasonably possible but
not probable, as defined pursuant to Statement of Financial
Accounting Standards No. 5.
3. Transactions with Related Parties:
Under the Agreement, a division of W.P. Carey is entitled to receive a
property management fee and reimbursement of certain expenses
incurred in connection with the Partnership's operations (see Note
11). Property management fee in 1995 includes the effect of a lease
restructuring transaction. General and administrative expense
reimbursements consist primarily of the actual cost of personnel
needed in providing administrative services, necessary to the
operation of the Partnership. Property management fee and general and
administrative expense reimbursements are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Property management fee $ 57,148 $254,174 $101,644
General and administrative
expense reimbursements 56,265 51,138 51,394
-------- -------- --------
$113,413 $305,312 $153,038
======== ======== ========
</TABLE>
Continued
-11-
<PAGE> 10
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATION FINANCIAL STATEMENTS, Continued
During 1994, 1995 and 1996, fees aggregating $29,657, $39,370 and
$192,086, respectively, were incurred for legal services performed by
a firm in which the Secretary of the Corporate General Partner and
other affiliates is a partner.
The Partnership is a participant in an agreement with W.P. Carey and
other affiliates for the purpose of leasing office space used for the
administration of real estate entities and W.P. Carey and for sharing
the associated costs. Pursuant to the terms of the agreement, the
Partnership's share of rental, occupancy and leasehold improvement
costs is based on adjusted gross revenues, as defined. Net expenses
incurred in 1994, 1995 and 1996 were $46,172, $51,472 and $45,007,
respectively.
In connection with a note payable to an affiliate, which was paid off in
1996, the Partnership incurred interest expense of $20,335.
The Partnership's ownership interests in certain properties are jointly
held with affiliated entities as tenants-in-common with the
Partnership's ownership interests ranging from 28.5% to 40%. The
Partnership accounts for its assets and liabilities relating to
tenants-in-common interests on a proportional basis.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under
noncancellable operating leases amount to approximately $1,981,000 in
1997; $1,774,000 in 1998; $1,767,000 in 1999; $1,772,000 in 2000; and
$1,746,000 in 2001 and aggregate approximately $15,938,000 through
2012.
Contingent rents were approximately $65,000 in 1996.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
----------- -----------
<S> <C> <C>
Minimum lease payments
receivable $37,321,569 $34,832,818
Unguaranteed residual value 22,700,673 22,700,673
----------- -----------
60,022,242 57,533,491
Less, Unearned income 39,962,115 37,273,961
----------- -----------
$20,060,127 $20,259,530
=========== ===========
</TABLE>
Scheduled future minimum rents, exclusive of renewals, under
noncancellable direct financing leases amount to approximately
$2,509,000 in 1997; $2,485,000 in 1998; $2,473,000 in 1999,
$2,543,000 in 2000; and $2,708,000 in 2001 and aggregate
approximately $34,833,000 through 2013.
Contingent rents were approximately $176,000 and $149,000 in 1994 and
1995, respectively. No contingent rents were realized in 1996.
Continued
-12-
<PAGE> 11
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Mortgage Notes Payable:
The Partnership's two mortgage notes payable, both of which are limited
recourse obligations, are collateralized by the assignment of leases
and by real property with a carrying amount as of December 31, 1996
of approximately $18,448,000, before accumulated depreciation. As of
December 31, 1996, mortgage notes payable bear interest at rates of
7.24% and 9% per annum. One mortgage note matures in 1998 and the
other mortgage note matures in 2010.
Scheduled principal payments during each of the next five years
following December 31, 1996 and thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1997 $ 895,764
1998 708,924
1999 370,390
2000 397,943
2001 427,546
Thereafter 4,986,494
----------
Total $7,787,061
==========
</TABLE>
Interest paid was $1,605,141, $1,422,223 and $769,023 in 1994, 1995 and
1996, respectively.
7. Distributions to Partners:
Distributions are declared and paid to partners quarterly and are
summarized as follows:
<TABLE>
<CAPTION>
Limited
Year Ending Distributions Paid to Distributions Paid to Partners' Per
December 31, General Partners Limited Partners Unit Amount
------------ --------------------- --------------------- -------------
<S> <C> <C> <C>
1994 $ 14,590 $1,444,300 $26.26
========== ========== ======
1995 $ 14,917 $1,476,750 $26.85
========== ========== ======
1996:
Quarterly distributions: $ 14,802 $1,465,426 $26.68
Special distribution 823,500 15.00
---------- ---------- ------
Total 1996 $ 14,802 $2,288,926 $41.68
========== ========== ======
</TABLE>
Distributions of $3,532 to the General Partners and $349,713 to the
Limited Partners for the quarter ended December 31, 1996 were
declared and paid in January 1997.
8. Income for Federal Tax Purposes:
Income for financial statement purposes differs from income for Federal
income tax purposes because of the difference in the treatment of
certain items for income tax purposes and financial statement
purposes. A reconciliation of accounting differences is as follows:
Continued
-13-
<PAGE> 12
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net income per Statements of Income $ 1,732,055 $2,596,081 $2,624,782
Excess tax depreciation (630,883) (612,649) (368,687)
Writedown to net realizable value 445,551
Restructuring fee 3,237,685
Other (138,363) (106,511) (288,538)
----------- ---------- ----------
Income reported for Federal
income tax purposes $ 1,408,360 $5,114,606 $1,967,557
=========== ========== ==========
</TABLE>
9. Industry Segment Information:
The Partnership's operations consist of the investment in and the
leasing of industrial and commercial real estate.
In 1994, 1995 and 1996, the Partnership earned its total operating
revenues (rental income plus interest income from direct financing
leases) from the following lease obligors:
<TABLE>
<CAPTION>
1994 % 1995 % 1996 %
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unisource Worldwide, Inc. $1,314,240 27% $1,316,677 27% $1,316,677 29%
Pre Finish Metals Incorporated 891,558 18 937,772 19 967,600 21
Gibson Greetings, Inc. 1,847,712 37 1,708,392 35 823,776 18
Cleo, Inc. 46,763 1 444,576 10
AT&T Corporation 295,429 6 295,728 6 296,066 7
New Valley Corporation 410,266 8 237,162 5 236,784 5
Other 113,807 2 206,959 4 171,169 4
Maybelline Products Co., Inc. 143,000 3 156,000 3
B & G Contract Packaging, Inc. 126,000 3
Family Dollar Stores, Inc. 78,000 2
---------- ---------- --------- ---------- ---------- ----------
$4,951,012 100% $4,892,453 100% $4,538,648 100%
========== ========== ========== ========== ========== ==========
</TABLE>
10. Properties Formerly Leased to New Valley Corporation:
The Partnership and Corporate Property Associates 3 ("CPA(R):3"), an
affiliate, own 39% and 61% interests, respectively, in three
properties located in Reno, Nevada; Bridgeton, Missouri; and
Moorestown, New Jersey. Until May 1993, the three properties were
leased to New Valley Corporation ("New Valley"). On April 1, 1993,
New Valley filed a petition of voluntary bankruptcy seeking
reorganization under Chapter 11 of the United States Bankruptcy Code.
In connection with the bankruptcy filing, the Bankruptcy Court
approved New Valley's termination of its lease with the Partnership
and CPA(R):3 for the Moorestown, New Jersey property in May 1993. In
December 1994, the Bankruptcy Court also approved the termination of
New Valley's lease on the Reno property effective December 31, 1994.
In connection with the lease termination, the Partnership wrote down
the Reno property in 1994 to its estimated net realizable value of
$1,295,000 and recognized a charge of $445,551 on the writedown. New
Valley continues to lease the Bridgeton property.
Continued
-14-
<PAGE> 13
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to FINANCIAL STATEMENTS, Continued
In 1995 the Partnership and CPA(R):3 entered into a lease agreement with
Sports & Recreation, Inc. ("Sports & Recreation") for the Moorestown
property. The agreement provided that after conversion of the
facility into a retail store, a lease term of 16 years with an
initial rent of $308,750 (of which the Partnership's share is
$121,000) would commence. During 1996 Sports & Recreation indicated
to the Partnership and CPA(R):3 that it had decided not to occupy the
property and would seek to terminate the lease. At that time, the
Partnership and CPA(R):3 rejected as inadequate Sports & Recreation's
offer of $300,000 as a settlement in exchange for being released from
its lease obligations. Sports & Recreation has paid all scheduled
rents. The Partnership and CPA(R):3 expect that Sports & Recreation
will resume discussions for the purposes of reaching a termination
settlement; however, no discussions are currently in progress.
On August 28, 1996 the Partnership and CPA(R):3 entered into a lease
agreement for the Reno property with Excel Teleservices, Inc.
("Excel"). The lease obligations of Excel have been guaranteed by its
parent company, Excel Telecommunications, Inc. The initial lease term
commenced on December 26, 1996. Annual rent during the first five
years is $532,800 increasing to $580,800 thereafter (of which the
Partnership's share is $207,800 and $226,600, respectively). The
lease, which has a term of ten years, 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.
In connection with the termination of the Moorestown and Reno leases,
the Partnership and CPA(R):3 expect to receive a bankruptcy
settlement from New Valley. The amount of such settlement cannot be
estimated and no amounts that the Partnership may ultimately receive
have been recorded in the accompanying financial statements.
11. Properties Leased to Gibson Greetings, Inc.:
In January 1982, the Partnership and CPA(R):3 entered into a net lease
with Gibson Greetings, Inc. ("Gibson"), for three properties in
Memphis, Tennessee; Berea, Kentucky; and Cincinnati, Ohio. In 1988,
the Partnership and CPA(R):3 consented to Gibson's sublease of the
Memphis, Tennessee property to a wholly-owned subsidiary, Cleo, Inc.
("Cleo"). The lease for the three properties had an initial term of
20 years with two five-year renewal options and provided for minimum
annual rentals of $5,865,000 with rent increases every five years
based on a formula indexed to the CPI. The lease also provided Gibson
with a purchase option which was exercisable during the tenth year of
the lease and at the end of the initial term. Gibson declined to
exercise its purchase option in 1992.
In connection with Gibson's sale of the Cleo subsidiary to CSS
Industries, Inc. ("CSS"), the Partnership, CPA(R):3 and Gibson
entered into an agreement on November 15, 1995, whereby the Memphis,
Tennessee property occupied by Cleo was severed from the Gibson
master lease, the Gibson lease was amended and Cleo entered into a
separate lease for the Tennessee property with CSS as the guarantor
of Cleo's lease obligations. The Partnership and CPA(R):3 received
$12,200,000 (of which the Partnership's share was $3,477,000) as a
one-time lump sum payment in consideration for severing the Tennessee
property from the Gibson master lease. Gibson still retains certain
specific obligations for any environmental violations which may be
detected and which resulted from any pre-existing conditions at the
Tennessee property.
The Gibson lease on the two remaining properties in Kentucky and Ohio,
as amended, provides for an initial term which has been extended
through November 30, 2013, and provides for one renewal term of ten
years. Annual rent is $3,100,000 (of which the Partnership's share is
approximately $733,000), with stated increases of 20% every five
years through the end of the
Continued
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<PAGE> 14
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to FINANCIAL STATEMENTS, Continued
renewal term. The lease includes new purchase options exercisable on
November 30, 2005 and 2010 and Gibson has the right to exercise the
purchase option on either one of its leased properties or both. The
option is exercisable at fair market value of the properties as
encumbered by the lease.
The Cleo lease provides for a ten-year term through December 31, 2005
with two five-year renewal terms. Annual rent is $1,500,000 (of which
the Partnership's share is approximately $355,000), and there is a
rent increase effective January 1, 2001. The rent increase will be
based on a formula indexed to the CPI; however, the increased annual
rent will be at least $1,689,000 but no more than $1,898,000. Cleo
has an option to purchase the property at any time during the term of
the lease so long as there is no event of monetary default. Exercise
of the purchase option requires at least six months' notice. The
exercise price is the greater of (i) $15,000,000 or (ii) fair market
value capped at a maximum of $16,250,000.
In connection with the payment made by Gibson to sever the Tennessee
property from the Gibson lease, the Partnership deferred recognition
of a gain on restructuring of $3,237,685, consisting of the
Partnership's $3,477,000 share of the lump sum payment offset by
costs of $239,315 including management fees of $173,000, payable to
an affiliate. The Partnership is amortizing such deferral over the
remaining initial terms of the Gibson and Cleo leases. The net
proceeds from the agreement as well as other available funds were
used to pay off the Partnership's share of the mortgage loan
collateralized by the Gibson properties of $6,153,000 in November
1995.
12. Environmental Matters:
All of the Partnership's properties are subject to environmental
statutes and regulations regarding the discharge of hazardous
materials and related remediation obligations. All of the
Partnership's properties are currently leased to corporate tenants.
The Partnership generally structures a lease to require the tenant to
comply with all laws. In addition, substantially all of the
Partnership's net leases include provisions which require tenants to
indemnify the Partnership from all liabilities and losses related to
their operations at the leased properties. The costs for remediation,
which are being performed and paid for by the affected tenant at
three of the properties, are not expected to be material. In the
event that the Partnership absorbs a portion of such costs because of
a tenant's failure to fulfill its obligations, the General Partners
believe such expenditures will not have a material adverse effect on
the Partnership's financial condition, liquidity or results of
operations.
In 1994, based on the results of Phase I environmental reviews performed
in 1993, the Partnership voluntarily conducted Phase II environmental
reviews on four of its properties. The Partnership believes, based on
the results of such Phase I and Phase II reviews, that its properties
are in substantial compliance with Federal and state environmental
statutes and regulations. Portions of certain properties have been
documented as having a limited degree of contamination, principally
in connection with either leakage from underground storage tanks or
surface spills from facility activities. For those conditions which
were identified, the Partnership advised the affected tenant of the
Phase II findings and of its obligation to perform required
remediation.
13. Disclosures About Fair Value of Financial Instruments:
The carrying amounts of cash, receivables and accounts payable and
accrued expenses approximate fair value because of the short maturity
of these items.
The Partnership estimates that the fair value of the Partnership's two
mortgage notes payable approximates the carrying amount of such
mortgage notes at December 31, 1996. The fair value of debt
instruments was evaluated using a discounted cash flow model with
discount rates which take into account the credit of the tenants and
interest rate risk.
Continued
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
09/3/97 BY: /s/ Steven M. Berzin
- --------------- ------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
09/3/97 BY: /s/ Claude Fernandez
- --------------- ------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
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