<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1997
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
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(Exact name of registrant as specified in its charter)
CALIFORNIA 13-3022196
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 492-1100
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
NONE NONE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
SUBSIDIARY PARTNERSHIP UNITS
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(Title of Class)
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(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 (ss. 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 Subsidiary Partnership Units.
<PAGE> 2
PART I
Item 1. Business.
Registrant is engaged in the business of investing in commercial and
industrial real estate properties which are net leased to commercial and
industrial entities. Registrant was organized as a California limited
partnership on August 9, 1979. Effective January 1, 1998, the General Partner of
Registrant is Carey Diversified LLC ("Carey Diversified"). W. P. Carey & Co.,
Inc. and William Polk Carey were formerly the Corporate General Partner and the
Individual General Partner, respectively. Carey Diversified is also the General
Partner of Corporate Property Associates ("CPA(R):1"), Corporate Property
Associates 3 ("CPA(R):3"), Corporate Property Associates 4, a California limited
partnership ("CPA(R):4"), Corporate Property Associates 5 ("CPA(R):5"),
Corporate Property Associates 6 - a California limited partnership ("CPA(R):6"),
Corporate Property Associates 7 - a California limited partnership ("CPA(R):7"),
Corporate Property Associates 8, L.P., a Delaware limited partnership
("CPA(R):8") and Corporate Property Associates 9, L.P., a Delaware limited
partnership ("CPA(R):9"). Registrant has entered into an agreement with Carey
Management LLC ("Carey Management") pursuant to which Carey Management performs
a variety of management services for Registrant.
Registrant has only one industry segment which consists of the
investment in and the leasing of industrial and commercial real estate. See
Selected Financial Data in Item 6 for a summary of Registrant's operations. Also
see the material contained in the Prospectus of Registrant dated January 18,
1980 under the heading INVESTMENT OBJECTIVES AND POLICIES.
The properties owned by Registrant are described in Item 2.
Registrant's entire net proceeds from the public offering, less any return of
capital and a working capital reserve have been fully invested in net leased
commercial and industrial real estate since November 30, 1982, the date of
Registrant's final real estate acquisition.
For the year ended December 31, 1997, revenues from properties
occupied by tenants which accounted for 10% or more of operating revenue were as
follows: Unisource Worldwide, Inc. ("Unisource"), 27%; Pre Finish, Metals, Inc.
("Pre Finish"), 20% and Gibson Greetings, Inc., 17%. No other property owned by
Registrant accounted for 10% or more of its total operating revenues during
1997. See Note 9 to the Financial Statements in Item 8. Unisource and Material
Sciences Corporation ("MSC"), guarantor of Pre Finish's lease obligations, are
publicly traded companies. For the fiscal year ended September 30, 1997,
Unisource's audited financial statement reported revenues of $7,108,400,000, net
income of $58,700,000, total assets of $2,558,000,000 and shareholders' equity
of $984,400,000. MSC's audited financial statements for the year ended February
28,1997 reported net sales of $278,017,000, net income of $16,236,000, total
assets of $254,089,000 and shareholders' equity of $133,373,000.
All of Registrant's real estate properties are leased to corporate
tenants under net leases. A net lease generally requires tenants to pay all
operating expenses relating to the leased properties including maintenance, real
estate taxes, insurance and utilities which under other forms of leases are
often paid by the lessor. Lessees are required to include Registrant as an
additional insured party on all insurance policies relating to the leased
properties. In addition, substantially all of the net leases include
indemnification provisions which require the lessees to indemnify Registrant and
the General Partner for liabilities on all matters related to the leased
properties. Registrant believes that the insurance and indemnity provided on its
behalf by its lessees provides adequate coverage for property damage and any
liability claims which may arise against Registrant's ownership interests. In
addition to the insurance and indemnification provisions of the leases,
Registrant has contingent property and liability insurance for its leased
properties and primary property
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and liability for its property in Maumelle, Arkansas which is reimbursed by
tenants. To the extent that any lessees are not financially able to satisfy
indemnification obligations which exceed insurance reimbursements, Registrant
may incur the costs necessary to repair properties and settle liabilities.
As described above, lessees retain the obligation for the operating
expenses of their leased properties so that, other than rental income, there are
no significant operating data (i.e. expenses) reportable on Registrant's leased
properties. As discussed in Registrant's Management's Discussion and Analysis in
Item 7, Registrant's leases generally provide for periodic rent increases which
are either stated and negotiated at the inception of the lease or based on
formulas indexed to increases in the Consumer Price Index. Registrant's leases
have initial lease terms which generally end between 2001 and 2013 with such
leases providing for multiple renewal terms of generally five or ten years.
Registrant's leases with Pre Finish, Unisource, Gibson and Cleo, Inc. include
purchase options which provide for purchase of leased properties exercisable at
the greater of fair market value, as defined in the lease, or a stated amount.
No purchase options are exercisable until June 1998.
As described in Note 10 to the Financial Statements in Item 8, in
connection with the bankruptcy claim of Registrant and CPA(R):3 against New
Valley Corporation ("New Valley"), the Bankruptcy Court entered a judgment in
January 1998 which awarded Registrant and CPA(R):3: $2,900,000 (of which
Registrant's share is $1,130,000) on their claim. New Valley has elected to
appeal the Bankruptcy Court's judgment to the United States District Court for
the District of New Jersey (Newark). The Partnership and CPA(R):3 have
cross-appealed on different issues.
Since Registrant's objective has been to invest in properties which
are occupied by a single corporate tenant and subject to long-term net leases
backed by the credit of the corporate lessee, Registrant's properties have not
been generally subject to the competitive conditions of local and regional real
estate markets. In selecting its real estate investments, Registrant's strategy
was to identify properties which included operations of material importance to
the lessee so that the lessee would be more likely to extend its lease beyond
the initial term or exercise a purchase option if such option was provided for
in the lease agreement. Registrant believes that this strategy reduces its
exposure to the competitive conditions of the local and regional real estate
markets. Because Registrant may be affected by the financial condition of its
lessees rather than the competitive conditions of the real estate marketplace,
Registrant's strategy has been to diversify its investments among tenants,
property types and industries in addition to achieving geographical
diversification.
Registrant voluntarily performed initial environmental reviews of
all of its properties in 1993. Registrant believes, based on the results of such
reviews and Phase II environmental reviews of four of its properties in 1994,
that its properties are in substantial compliance with Federal and state
environmental statutes and regulations. Phase II reviews were performed only on
certain properties based on the recommendations of the Phase I reviews. Portions
of certain properties have been subject to a limited degree of contamination,
principally in connection with either leakage from underground storage tanks or
surface spills from facility activities. In many instances, tenants are actively
engaged in the remediation process and addressing identified conditions. For
those conditions which were identified, Registrant advised its tenants of such
findings and of their obligations to perform additional investigations and any
required remediation. Tenants are generally subject to environmental statutes
and regulations regarding the discharge of hazardous materials and any related
remediation obligations. In addition, Registrant's leases generally require
tenants to indemnify Registrant from all liabilities and losses related to the
leased properties. Accordingly, Management believes that the ultimate resolution
of the aforementioned environmental matters will not have a material adverse
effect on Registrant's financial condition, liquidity or results of operations.
On October 16, 1997, Registrant distributed a Consent Solicitation
Statement/Prospectus to the Limited Partners that described a proposal to
consolidate Registrant with the other CPA(R) Partnerships. Proposals that each
of the nine CPA(R) limited partnerships be merged with a corresponding
subsidiary partnership of Carey Diversified, of which Carey Diversified is the
general partner, were approved by the Limited Partners of all nine of the CPA(R)
limited partnerships. Each limited partner had the option of either exchanging
his or her limited partnership interest for an interest in Carey Diversified
("Listed Shares") or to retain a limited partnership interest in the subsidiary
partnership ("Subsidiary Partnership Units"). On January
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1, 1998, 1,937 holders representing 54,227 of the 54,900 limited partnership
units exchanged such units for 1,516,187 Listed Shares with 29 holders of the
remaining 673 limited partnership units exchanging such units for Subsidiary
Partnership Units. The former General Partners received 158,192 Listed Shares
for their interest in their share of the appreciation in Registrant properties.
The Listed Shares are listed on the New York Stock Exchange. The
Subsidiary Partnership Units provide substantially the same economic interest
and legal rights as those of a limited partnership unit in Registrant prior to
the Consolidation, but are not listed on a securities exchange. A liquidating
distribution to holders of Subsidiary Partnership Units will be made after an
appraisal of Registrant's properties. The date of such an appraisal is to be no
later than December 31, 1998.
Registrant does not have any employees. Carey Management, an
affiliate of the General Partner of Registrant performs accounting, secretarial
and transfer services for Registrant. Chase Mellon Shareholder Services, Inc.
also performs certain transfer services for Registrant and The Chase Manhattan
Bank performs certain banking services for Registrant. In addition, Registrant
has entered into an agreement with Carey Management pursuant to which Carey
Management provides certain management services to Registrant.
Registrant's management company has responsibility for maintaining
the company's books and records. An affiliate of the management company services
the computer systems used in maintaining such books and records. In its
preliminary assessment of Year 2000 issues, the affiliate believes that such
issues will not have a material effect on the Registrant's operations; however,
such assessment has not been completed. Registrant relies on its bank and
transfer agent for certain computer-related services and has initiated
discussions to determine whether they are addressing Year 2000 issues that might
affect the Registrant.
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<PAGE> 5
Item 2. Properties.
Registrant's properties are as follows:
<TABLE>
<CAPTION>
LEASE TYPE OF OWNERSHIP
OBLIGOR TYPE OF PROPERTY LOCATION INTEREST
------- ---------------- -------- -----------------
<S> <C> <C> <C>
GIBSON GREETINGS, Land and Manufacturing Cincinnati, Ownership of a 28.5%
INC. Warehouse Buildings Ohio and interest in land and
- 2 locations Berea, Kentucky buildings
CSS INDUSTRIES, Land and Manufac- Memphis, Ownership of a 28.5%
INC./CLEO, INC. turing/Warehouse Tennessee interest in land and
Building buildings
UNISOURCE Land and Office/ City of Commerce, 100% interest in LLC
WORLDWIDE, Warehouse/Distri- California which owns land
INC. bution Center and building (1)
WESTERN UNION Land and Bridgeton, Ownership of an
FINANCIAL SERVICES, Centralized Missouri approximate 39%
INC. Telephone Bureau interest in land
and buildings
SPORTS & Land and Moorestown, Ownership of an
RECREATION, Building New Jersey approximate 39%
INC. interest in land
and buildings
AT&T CORPORATION Land and a Bridgeton, Ownership of an
Computer Center Missouri approximate 39%
interest in land
and building
EXCEL TELE- Land and Reno, Ownership of an
COMMUNICATIONS, Building Nevada approximate 39%
INC. interest in land
and buildings
PRE FINISH METALS Land and Warehouse/ Walbridge, Ohio Ownership of a 40%
INCORPORATED Manufacturing Plant interest in land
and building (1)
B&G CONTRACT Land and Warehouse/ Maumelle, Ownership of land
PACKAGING, INC. Distribution Center Arkansas and building
WEXLER AND WEXLER Land and Retail New Orleans, Ownership of land
Stores Louisiana and building
A. JONES Land and Retail Greensboro, North Ownership of land
Stores Carolina and building
KINKOS OF OHIO, INC. Land and Retail Store Canton, Ohio Ownership of land
(on adjacent sites) and building
</TABLE>
(1) These properties are encumbered by mortgage notes payable.
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The material terms of Registrant's leases with its significant
tenants are summarized in the following table:
<TABLE>
<CAPTION>
Registrant's
Share Current Lease
Lease of Current Square Rent Per Expiration Renewal Ownership
Obligor Annual Rents Footage Sq.Ft.(1) (Mo./Year) Terms Interest Terms of Purchase Option
- ------- ------------ ------- --------- ---------- ----- -------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gibson $ 733,429 1,194,840 2.59 04/2010 YES 28.5% interest as Fair market value as
Greetings, tenant-in-common; encumbered by the
Inc. remaining interest lease.
owned by Corporate
Property Associates
3 ("CPA(R):3")
CSS 345,600 1,006,566 1.49 12/2005 YES 28.5% interest as tenant- The greater of fair
Industries, in-common; remaining market value or
Inc./Cleo, interest owed by CPA(R):3 $4,275,000. Fair
Inc. market value is capped
at $4,631,250.
Unisource 1,292,800 411,579 3.14 04/2010 YES 100% The greater of
Worldwide, fair market
Inc. (3) value of the
property or
$10,744,680.
New Valley 257,632 78,080 8.41 11/2001 YES 39% interest; N/A
Corporation as tenant-in-
common,
remaining interest
owned by CPA(R):3
AT&T 311,709 55,810 14.24 11/2001 YES 39% interest; N/A
Corporation as tenant-in-
common,
remaining interest
owned by CPA(R):3
Pre Finish 968,639 (2) 313,704 7.72 06/2003 YES 40% interest; The greater of
Metals as tenant-in- fair market
Incorporated common, value of the
(3) remaining property or
interest owned $5,248,817 plus
by Corporate 2 1/2% thereof per
Property annum, not compounded,
Associates from 12/9/80 to the
closing date.
Sports & 121,093 74,066 4.17 05/2012 YES 39% interest; as tenant-in- N/A
Recreation, common interest owed by
Inc. CPA(R):3
Excel 208,966 53,158 10.02 12/2002 YES 39% interest; N/A
Commun- as tenant-in-
ications, Inc. common, remaining
interest owned by
CPA(R):3
</TABLE>
(1) Represents rate for rent per square foot when combined with rents
applicable to tenants-in-common.
(2) Partnership's share of equity rent of $331,403 plus variable debt rent
(3) These properties are encumbered by limited recourse mortgages.
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Item 3. Legal Proceedings.
As of the date hereof, Registrant is not a party to any material
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Information with respect to matters submitted to a vote of security
holders during the fourth quarter of the year ended December 31, 1997 is hereby
incorporated by reference to Page 22 of Registrant's Annual Report contained in
Appendix A.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to Registrant's common equity is hereby
incorporated by reference to page 22 of Registrant's Annual Report contained in
Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page
1 of Registrant's Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by
reference to pages 2 to 4 of Registrant's Annual Report contained in Appendix A.
Item 8. Consolidated Financial Statements and Supplementary Data.
The following financial statements and supplementary data are hereby
incorporated by reference to pages 5 to 17 of Registrant's Annual Report
contained in Appendix A.
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 1997 and 1997.
(iii) Consolidated Statements of Income for the years ended December 31,
1995, 1996 and 1997.
(iv) Consolidated Statements of Partners' Capital for the years ended
December 31, 1995, 1996 and 1997.
(v) Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1996 and 1997.
(vi) Notes to Consolidated Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
NONE
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<PAGE> 8
PART III
Item 10. Directors and Executive Officers of the Registrant.
Registrant has no officers or directors. The directors and executive
officers of the General Partner, Carey Diversified LLC, are as follows:
<TABLE>
<CAPTION>
Has Served as a
Director and/or
Name Age Positions Held Officer Since (1)
---- --- -------------- -----------------
<S> <C> <C> <C>
Francis J. Carey 72 Chairman of the Board 1/98
Chief Executive Officer
Director
William Polk Carey 67 Chairman of the Executive Committee 1/98
Director
Steven M. Berzin 47 Vice Chairman 1/98
Chief Legal Officer
Director
Gordon F. DuGan 31 President 1/98
Chief Acquisitions Officer
Director
Donald E. Nickelson 64 Chairman of the Audit Committee 1/98
Director
Eberhard Faber, IV 61 Director 1/98
Barclay G. Jones III 37 Director 1/98
Lawrence R. Klein 77 Director 1/98
Charles C. Townsend, Jr. 69 Director 1/98
Reginald Winssinger 55 Director 1/98
Claude Fernandez 45 Executive Vice President 1/98
- Financial Operations
John J. Park 33 Executive Vice President 1/98
Chief Financial Officer
Treasurer
H. Augustus Carey 40 Senior Vice President 1/98
Secretary
Samantha K. Garbus 29 Vice President - Asset Management 1/98
Susan C. Hyde 29 Vice President - Shareholder Services 1/98
Robert C. Kehoe 37 Vice President - Accounting 1/98
Edward V. LaPuma 24 Vice President - Acquisitions 1/98
</TABLE>
William Polk Carey and Francis J. Carey are brothers. H. Augustus
Carey is the nephew of William Polk Carey and the son of Francis J. Carey.
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<PAGE> 9
A description of the business experience of each officer and
director of the Corporate General Partner is set forth below:
Francis J. Carey, Chairman of the Board, Chief Executive Officer and
Director, was elected President and a Managing Director of W. P. Carey & Co.
("W.P. Carey") in April 1987, having served as a Director since its founding in
1973. Prior to joining the firm full-time, he was a senior partner in
Philadelphia, head of the Real Estate Department nationally and a member of the
executive committee of the Pittsburgh based firm of Reed Smith Shaw & McClay,
counsel for Registrant, the General Partners, the CPA(R) Partnerships, W.P.
Carey and some of its affiliates. He served as a member of the Executive
Committee and Board of Managers of the Western Savings Bank of Philadelphia from
1972 until its takeover by another bank in 1982 and is former chairman of the
Real Property, Probate and Trust Section of the Pennsylvania Bar Association.
Mr. Carey served as a member of the Board of Overseers of the School of Arts and
Sciences of the University of Pennsylvania from 1983 through 1990. He has also
served as a member of the Board of Trustees of the Investment Program
Association since 1990 and on the Business Advisory Council of the Business
Council for the United Nations since 1994. He holds A.B. and J.D. degrees from
the University of Pennsylvania.
Gordon F. DuGan, President, Chief Acquisitions Officer and Director,
was elected Executive Vice President and a Managing Director of W.P. Carey in
June 1997. Mr. Dugan rejoined W.P. Carey as Deputy Head of Acquisitions in
February 1997. Mr. Dugan was until September 1995 a Senior Vice President in
the Acquisitions Department of W.P. Carey. Mr. Dugan joined W.P. Carey as
Assistant to the Chairman in May 1988, after graduating from the Wharton School
at the University of Pennsylvania where he concentrated in Finance. From
October 1995 until February 1997, Mr. Dugan was Chief Financial Officer of
Superconducting Core Technologies, Inc., a Colorado-based wireless
communications equipment manufacturer.
Steven M. Berzin, Vice Chairman, Chief Legal Officer and Director,
was elected Executive Vice President, Chief Financial Officer, Chief Legal
Officer and a Managing Director of W.P. Carey in July 1997. From 1993 to 1997,
Mr. Berzin was Vice President - Business Development of General Electric Capital
Corporation in the office of the Executive Vice President and, more recently, in
the office of the President, where he was responsible for business development
activities and acquisitions. From 1985 to 1992, Mr. Berzin held various
positions with Financial Guaranty Insurance Company, the last two being Managing
Director, Corporate Development and Senior Vice President and Chief Financial
Officer. Mr. Berzin associated with the law firm of Cravath, Swaine & Moore
from 1978 to 1985 and from 1976 to 1977, he served as law clerk to the Honorable
Anthony M. Kennedy, then a United States Circuit Judge. Mr. Berzin received a
B.A. and M.A. in Applied Mathematics from Harvard University, a B.A. in
Jurisprudence and an M.A. from Oxford University and a J.D. from Harvard Law
School..
Donald E. Nickelson, Chairman of the Audit Committee and Director,
serves as Chairman of the Board and a Director of Greenfield Industries, Inc.
and a Director of Allied Healthcare Products, Inc. Mr. Nickelson is
Vice-Chairman and a Director of the Harbor Group, a leverage buy-out firm. He
is also a Director of Sugen Corporation and D.T.I. Industries, Inc. and a
Trustee of mainstay Mutual Fund Group. From 1986 to 1988, Mr. Nickelson was
President of PaineWebber Incorporated; from 1988 to 1990, he was President of
the PaineWebber Group; and from 1980 to 1993 a Director. Prior to 1986, Mr.
Nickelson served in various capacities with affiliates of PaineWebber
Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a
Director of a diverse group of corporations in the manufacturing, service and
retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles,
Inc. and Motor Wheel Corporation. He is a former Chairman of National Car
Rentals, inc. Mr. Nickelson is also a former Director of the Chicago Board
Options Exchange and is the former Chairman of the Pacific Stock Exchange.
William Polk Carey, Chairman of the Executive Committee and
Director, has been active in lease financing since 1959 and a specialist in net
leasing of corporate real estate property since 1964. Before founding W.P. Carey
in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt
& Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment
Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and
Private Placements, Director of Corporate Finance and Vice Chairman of the
Investment Banking Board of duPont Glore Forgan Inc. A graduate of the
University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey
is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT). He also serves on the boards of The Johns Hopkins University, The
James A. Baker III Institute for Public Policy at Rice University, Templeton
College of
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<PAGE> 10
Oxford University and other educational and philanthropic institutions. He
founded the Visiting Committee to the Economics Department of the University of
Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research
Institute at that University. Mr. Carey is also a Director of CPA(R):10,
CIP(TM) and CPA(R):12.
Eberhard Faber IV, is currently a Director of PNC Bank, N.A.,
Chairman of the Board and Director of the newspaper Citizens Voice, a Director
of Ertley's Motorworld, Inc., Vice-Chairman of the Board of King's College and a
Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and
Chief Executive Officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber
also served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern bank from 1980 to 1993.
Barclay G. Jones III, Executive Vice President, Managing Director,
and head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant
to the President in July 1982 after his graduation from the Wharton School of
the University of Pennsylvania, where he majored in Finance and Economics. He
was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is
also a Director of the Wharton Business School Club of New York.
Lawrence R. Klein, Director, is Benjamin Franklin Professor of
Economics Emeritus at the University of Pennsylvania, having joined the faculty
of Economics and the Wharton School in 1958. He holds earned degrees from the
University of California at Berkeley and Massachusetts Institute of Technology
and has been awarded the Nobel Prize in Economics as well as over 20 honorary
degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein
has been counselor to various corporations, governments, and government agencies
including the Federal Reserve Board and the President's Council of Economic
Advisers.
Charles C. Townsend, Jr., Director, currently is an Advisory
Director of Morgan Stanley & Co., having held such position since 1979. Mr.
Townsend was a Partner and a Managing Director of Morgan Stanley & Co. from 1963
to 1978 and served as Chairman of Morgan Stanley Realty Corporation from 1977 to
1982. Mr. Townsend holds a B.S.E.E. from Princeton University and an M.B.A.
from Harvard University. Mr. Townsend serves as Director of CIP(TM) and
CPA(R)14.
Reginald Winssinger, Director, is currently Chairman of the Board
and Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed
portfolios of diversified real estate assets exceeding $500 million throughout
the United States for more than 20 years. Mr. Winssinger is active in the
planning and development of major land parcels and has developed 20 commercial
properties. Mr. Winssinger is a native of Belgium with more than 25 years of
real estate practice, including 10 years based in Brussels, overseeing
appraisals, construction and management. Mr. Winssinger holds a B.S. in
Geography from the University of California at berkeley and received a degree in
Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary
Belgium Consul to the State of Arizona, a position he has held since 1991.
Claude Fernandez, Executive Vice President - Financial Operations,
joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for
two years and with Arthur Andersen & Co., he is a Certified Public Accountant.
Mr. Fernandez received a B.S. degree in accounting from New York University in
1975 and his M.B.A. in Finance from Columbia University Graduate School of
Business in 1981.
John J. Park, Executive Vice President, Chief Financial Officer and
Treasurer, joined W.P. Carey as an Investment Analyst in December 1987. Mr.
Park received his undergraduate degree from Massachusetts Institute of
Technology and his M.B.A. in Finance from New York University.
H. Augustus Carey, Senior Vice President and Secretary, returned to
W.P. Carey in 1988 and is President of W.P. Carey's broker-dealer subsidiary.
Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the
President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of
the North American Department of Kleinwort Benson Limited in London, England. He
received an A.B. from Amherst College in 1979 and an M.Phil. in Management
Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford
Management Centre Associates Council.
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<PAGE> 11
Samantha K Garbus, Vice President - Director of Asset Management,
became a Second Vice President of W.P. Carey in April 1995 and a Vice President
in April 1997. Ms. Garbus joined W. P. Carey as a Property Management Associate
in January 1992. Ms. Garbus received a B.A. in History from Brown University in
May 1990 and an M.B.A. from the Stern School of New York University in January
1997.
Susan C. Hyde, Vice President - Director of Shareholder Services,
joined W. P. Carey in 1990, became a Second Vice President in April 1995 and a
Vice President in April 1997. Ms. Hyde graduated from Villanova University in
1990 where she received a B.S. in Business Administration with a concentration
in Marketing and a B.A. in English.
Robert C. Kehoe, Vice President - Accounting, joined W.P. Carey as a
Senior Accountant in 1987. Mr. Kehoe became a Second Vice President of W. P.
Carey in April 1992 and a Vice President in July 1997. Prior to joining the
company, Mr. Kehoe was associated with Deloitte, Haskins & Sells for three years
and was Manager of Financial Controls at CBS Educational and Professional
Publishing for two years. Mr. Kehoe received a B.S. in Accounting from
Manhattan College in 1982 and an M.B.A. in Finance from Pace University in 1993.
Edward V. LaPuma, Vice President - Acquisitions, joined W. P. Carey
as an Assistant to the Chairman in July 1995, became a Second Vice President in
July 1996 and a Vice President in April 1997. A graduate of the University of
Pennsylvania, Mr. LaPuma received a B.A. in Global Economic Strategies from The
College of Arts and Sciences and a B.S. in Economics with a Concentration in
Finance from the Wharton School.
Item 11. Executive Compensation.
Until January 1, 1998, under the Amended Agreement of Limited
Partnership of Registrant (the "Agreement"), 9/10th of 1% of Distributable Cash
From Operations was payable to the former Corporate General Partner and 1/10 of
1% of Distributable Cash From Operations, as defined, was payable to the former
Individual General Partner. The former Corporate General Partner and the former
Individual General Partner received $12,747 and $1,416, respectively, from
Registrant as their share of Distributable Cash From Operations during the year
ended December 31, 1997.
As owner of 200 Limited Partnership Units, the former Corporate
General Partner received cash distributions of $5,108 during the year ended
December 31, 1997. See Item 6 for the net income allocated to the General
Partners under the Agreement. Registrant is not required to pay, and has not
paid, any remuneration to the officers or directors of the former Corporate
General Partner or any other affiliate of Registrant during the year ended
December 31, 1997.
In the future, a special limited partner, Carey Management LLC will
receive 9/10th of 1% of Distributable Cash From Operations, William Polk Carey
will receive, as a special limited partner, 1/10th of 1% of Distributable Cash
From Operations and each will be allocated the same percentage of the profits
and losses of Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of December 31, 1997, no person owned of record, or was known by
Registrant to own beneficially more than 5% of the Registrant.
- 10 -
<PAGE> 12
The following table sets forth as of March 20, 1998 certain
information as to the ownership by directors and executive officers of
securities of the General Partner of Registrant:
<TABLE>
<CAPTION>
Number of Listed
Name of Shares and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- ---------------- -------------------- --------
<S> <C> <C> <C>
Listed Shares William Polk Carey
Francis J. Carey
Steven M. Berzin
Gordon F. DuGan
Donald E. Nickelson
Eberhard Faber IV
Barclay G. Jones III
Lawrence R. Klein
Charles C. Townsend, Jr.
Reginald Winssinger
John J. Park
Claude Fernandez
H. Augustus Carey
Susan K. Garbus
Susan C. Hyde
Robert C. Kehoe
Edward V. LaPuma
All executive officers
and directors as a
group (17 persons)
</TABLE>
In connection with Consolidation of Registrant into Carey
Diversified LLC, effective January 1, 1998, no officer or director, other than
William Polk Carey, owns a direct interest in Registrant. William Polk Carey
owns a 0.1% interest in Registrant as a special limited partner and has a
controlling interest in Carey Management LLC which owns a 0.9% interest in
Registrant as a special limited partner. Effective January 1, 1998, Carey
Diversified owns an approximate 98% interest in Registrant.
There exists no arrangement, known to Registrant, the operation of
which may at a subsequent date result in a change of control of Registrant.
Item 13. Certain Relationships and Related Transactions.
For a description of transactions and business relationships between
Registrant and its affiliates and their directors and officers, see Notes 2 and
3 to the Financial Statements in Item 8. Michael B. Pollack, Senior Vice
President and Secretary of the Corporate General Partner and certain of its
affiliates, is a partner of Reed Smith Shaw & McClay which is engaged to perform
legal services for Registrant. Mr. Pollack was the Secretary, until July 1997,
of the former Corporate General Partner.
No officer or director of the Corporate General Partner or any other
affiliate of Registrant or any member of the immediate family or associated
organization of any such officer or director was indebted to Registrant at any
time since the beginning of Registrant's last fiscal year.
- 11 -
<PAGE> 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a
part of this Report:
Report of Independent Accountants.
Consolidated Balance Sheets, December 31, 1996 and 1997.
Consolidated Statements of Income for the years ended December 31, 1995, 1996
and 1997.
Consolidated Statements of Partners' Capital for the years ended December 31,
1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997.
Notes to Consolidated Financial Statements.
The financial statements are hereby incorporated by reference to pages 5 to
17 of Registrant's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedule:
The following schedule is filed as a part of this Report:
Schedule III - Real Estate and Accumulated Depreciation as of December 31,
1997.
Notes to Schedule III.
Schedule III and notes thereto are hereby incorporated by reference to pages
18 to 20 of Registrant's Annual Report contained in Appendix A.
Financial Statement Schedules other than those listed above are
omitted because the required information is given in the Consolidated Financial
Statements, including the Notes thereto, or because the conditions requiring
their filing do not exist.
- 12 -
<PAGE> 14
(a)3. Exhibits:
The following exhibits are filed as part of this Report. Documents
other than those designated as being filed herewith are incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- ------
<S> <C> <C>
3.1 Amended Agreement of Limited Partnership of Exhibit 3(B) to Regis-
Registrant dated as of November 1, 1979. tration Statement (Form
S-11) No. 2-65357
3.2 Amendment No. 1 dated April 29, 1980 to Exhibit 12 to Form 8-K
Amended Agreement of Limited Partnership filed May 12, 1980
of Registrant.
4.36 $11,000,000 Note dated May 30, 1986 Exhibit 4.2 to Form 8-K
from Creditanstalt-Bankverein dated July 14, 1986
("Creditanstalt"), as Lender, to the
Registrant and CPA(R):1, as Borrower.
4.37 Note Purchase Agreement dated as of Exhibit 4.3 to Form 8-K
May 30, 1986 between Material dated July 14, 1986
Sciences Corporation ("MSC"), as
Purchaser, and Creditanstalt,
as Lender.
4.38 Letter dated June 27, 1986 from Exhibit 4.4 to Form 8-K
Registrant and CPA(R):1 to Pre Finish dated July 14, 1986
Metals Incorporated ("PFM") and MSC
regarding Note Purchase Agreement.
4.39 Mortgage and Security Agreement Exhibit 4.5 to Form 8-K
dated as of May 30, 1986 between dated July 14, 1986
Registrant and CPA(R):1, as Mortgagor,
and Creditanstalt, as Mortgagee
and Secured Party.
4.40 Assignment of Agreements dated as of Exhibit 4.6 to Form 8-K
May 30, 1986 from the Registrant and dated July 14, 1986
CPA(R):1, as Assignors, to Creditanstalt,
as Assignee.
4.41 Assignment of Sublease dated as of Exhibit 4.7 to Form 8-K
May 30, 1986 from PFM, as Assignor, dated July 14, 1986
to the Registrant and CPA(R):1, as
Assignees.
4.42 Letter Agreement dated June 26, 1986 Exhibit 4.8 to Form 8-K
among Creditanstalt, as Lender, and dated July 14, 1986
MSC and PFM.
</TABLE>
- 13 -
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- ------
<S> <C> <C>
4.43 Joint Tenancy Agreement dated Exhibit 4.9 to Form 8-K
May 30, 1986 between Registrant and CPA(R):1. dated July 14, 1986
10.1 Management Agreement between Registrant Exhibit 12(c) to
and Carey Corporate Property Management, Registration Statement
Inc. (Form S-11)
No. 2-65357
10.2 Amendment No. 1 dated April 29, 1980 to Exhibit 13 to Form 8-K
Management Agreement between Registrant dated May 12, 1980
and Carey Corporate Property Management,
Inc.
10.3 Support Agreement among Registrant, Second Exhibit 12(D) to Regis-
Carey Corporate Property, Inc. and W. P. tration Statement (Form
Carey & Co., Inc. S-11) No. 2-65357
10.5 Straw Party Agreement by and among Line 6 Exhibit 10.8 to Form 10-K
Corp., Registrant and Corporate Property dated March 31, 1982
Associates dated December 11, 1980.
10.6 Lease and Agreement between Line 6 Corp. Exhibit 10.9 to Form 10-K
and Pre Finish Metals Incorporated dated March 31, 1982
dated as of December 1, 1980.
10.7 Lease Agreement dated January 25, 1982 Exhibit 1 to Form 8-K
between Registrant and CPA(R):3, as dated February 10, 1982
landlord, and Gibson Greeting Cards, Inc.,
as tenants.
10.8 Indenture of Lease dated September 16, Exhibit 10(H) to Post-
1971 between Western Union Realty Effective Amendment No. 1
Corporation ("WURC"), as landlord, and to Registration Statement
The Western Union Telegraph Company (Form S-11) No. 2-70773
("WUTCO"), as tenant. of Corporate Property
Associates 3 ("CPA(R):3")
10.9 Amendment of Lease dated March 27, 1972 Exhibit 10(H)(5) to Post-
between WURC and WUTCO. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.10 Second Amendment of Lease dated Exhibit 10(H)(6) to Post-
November 16, 1981 between WURC and Effective Amendment No. 1
WUTCO. to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.11 Assignment of Lease from WUTCO to CPA(R):3 Exhibit 10(H)(7) to Post-
and Registrant, as tenants in common, Effective Amendment No. 1
dated November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
</TABLE>
- 14 -
<PAGE> 16
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- ------
<S> <C> <C>
10.12 Indenture of Lease dated November 14, Exhibit 10(H)(14) to Post-
1972 between WURC, as landlord, and Effective Amendment No. 1
Western Union Corporation ("WUC"), to Registration Statement
as tenant. (Form S-11) No. 2-70773 of
CPA(R):3
10.13 Amendment of Lease dated December 12, Exhibit 10(H)(15) to Post-
1972 between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.14 Amendment of Lease dated April 30, 1973 Exhibit 10(H)(16) to Post-
between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.15 Third Amendment of Lease Agreement dated Exhibit 10(H)(17) to Post-
November 12, 1981 between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.16 Assignment of Lease from WURC to CPA(R):3 Exhibit 10(H)(18) to Post-
and Registrant, as tenants in common, Effective Amendment No. 1
dated November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.17 Indenture of Lease dated July 12, 1972 Exhibit 10(H)(24) to Post-
between WURC, as landlord, and WUC, Effective Amendment No. 1
as tenant. to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.18 Amendment of Lease dated March 1, 1973 Exhibit 10(H)(25) to Post-
between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.19 Second Amendment of Lease Agreement dated Exhibit 10(H)(26) to Post-
November 16, 1981 between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.20 Assignment of Lease from WURC to CPA(R):3 Exhibit 10(H)(27) to Post-
and Registrant, as tenants in common, Effective Amendment No. 1
dated November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
</TABLE>
- 15 -
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- ------
<S> <C> <C>
10.21 Indenture of Lease dated December 18, Exhibit 10(H)(34) to Post-
1973 between WURC, as landlord, and Effective Amendment No. 1
WUC, as tenant. to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.22 Second Amendment of Lease Agreement dated Exhibit 10(H)(35) to Post-
November 16, 1981 between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773 of CPA(R):3
10.23 Assignment of Lease from WURC to CPA(R):3 Exhibit 10(H)(36) to Post-
and Registrant, as tenants in common, Effective Amendment No. 1
dated November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773 of
CPA(R):3
10.25 Contract of Sale dated November 16, 1981 Exhibit 10.11 to Form 10-K
between Western Union Realty Corporation, dated March 31, 1982 as
seller, and Registrant and CPA(R):3, as
purchasers.
10.26 Letter of Intent from Registrant to Gibson Exhibit 2.1 to Form 8-K
Realty, Inc. and Wesray Packing, Inc. dated October 6, 1982
dated September 22, 1982.
10.27 First Amendment to Lease and Exhibit 10.2 to Form 8-K
Agreement dated as of May 30, 1986 dated July 14, 1986
between Registrant and CPA(R):1, as
Lessor, and PFM, as Lessee.
10.28 Memorandum of First Amendment to Exhibit 10.3 to Form 8-K
Lease and Agreement dated May 30, dated July 14, 1986
1986 between Registrant and CPA(R):1,
as Lessor, and PFM, as Lessee
10.29 Letter dated June 30, 1986 from Exhibit 10.4 to Form 8-K
Creditanstalt to PFM regarding dated July 14, 1986
Lease as amended by First Amendment
to Lease and Agreement, dated May
30, 1986.
10.30 Lease Guaranty dated as of May 30, Exhibit 10.5 to Form 8-K
1986 from MSC to Registrant and dated July 14, 1986
CPA(R):1 and Creditanstalt.
10.31 Sublease dated as of May 30, 1986 Exhibit 10.6 to Form 8-K
between PFM and Walbridge Coatings dated July 14, 1986
("Walbridge").
10.32 Memorandum of Sublease dated as of Exhibit 10.7 to Form 8-K
May 30, 1986 by and between PFM and dated July 14, 1986
Walbridge.
10.33 Letter of Agreement dated November 24, 1992 Exhibit 10.1 to Form 8-K
between Registrant and Heekin Can, Inc. dated December 10, 1992
</TABLE>
- 16 -
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- ------
<S> <C> <C>
10.34 Lease Agreement dated November 15, 1995 Exhibit 10.34 to Form 10-K
by and between Registrant and CPA(R):3, dated April 8, 1996
as Landlord, and Cleo, Inc., as Tenant.
10.34 Lease Agreement dated November 15, 1995 Exhibit 10.34 to Form 10-K
by and between Registrant and CPA(R):3, dated April 8, 1996
as Landlord, and Cleo, Inc., as Tenant.
10.35 Lease Amendment Agreement dated November Exhibit 10.35 to Form 10-K
15, 1995 by and between Registrant and dated April 8, 1996
CPA(R):3, as Landlord, and Gibson
Greetings, Inc., as Tenant.
28.1 Instruction Letters from Cigna Exhibit 28.1 to Form 8-K
Corporation dated June 25, 1986 to dated July 14, 1986
Creditanstalt and Louisville Title
Agency regarding repayment of loan.
28.2 Estoppel Certificate dated as of Exhibit 28.2 to Form 8-K
June 30, 1986 from PFM to dated July 14, 1986
Creditanstalt.
28.3 Estoppel Certificate dated as of Exhibit 28.3 to Form 8-K
June 30, 1986 from Walbridge to dated July 14, 1986
Creditanstalt.
28.4 Seller's/Lessee's Certificate dated Exhibit 28.4 to Form 8-K
as of June 30, 1986 from PFM to dated July 14, 1986
Registrant and CPA(R):1.
28.5 Bill of Sale dated as of May 30, Exhibit 28.5 to Form 8-K
1986 from PFM to Registrant and dated July 14, 1986
CPA(R):1.
28.6 Deed dated as of May 30, 1986 from Exhibit 28.6 to Form 8-K
PFM to Registrant and CPA(R):1. dated July 14, 1986
28.7 Press release regarding Letter of Exhibit 28.1 to Form 8-K
Agreement. dated December 10, 1992
28.8 Prospectus of Registrant Filed as Exhibit 28.8 to
dated January 18, 1980. Form 10-K/A dated
September 24, 1993
28.9 Supplement dated May 7, 1980 Filed as Exhibit 28.9 to
to Prospectus dated January 18, 1980. Form 10-K/A dated
September 24, 1993
28.10 Press release dated June 30, 1993 Exhibit 28.1 to Form 8-K
announcing the suspension of secondary dated July 12, 1993
market sales of Limited Partnership Units.
</TABLE>
(b) Reports on Form 8-K
The Registrant filed a report on form 8-K dated January 1, 1998
pursuant to Item 5 - Other Events (EX-99.1 Press Release From W. P. Carey & Co.,
Inc. (December 17, 1997)).
- 17 -
<PAGE> 19
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)
and SUBSIDIARIES
BY: CAREY DIVERSIFIED LLC
03/23/98 BY: /s/ John J. Park
-------- ------------------------------------
Date John J. Park
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
BY: CAREY DIVERSIFIED LLC
03/23/98 BY: /s/ Francis J. Carey
-------- -----------------------------------
Date Francis J. Carey
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
03/23/98 BY: /s/ William P. Carey
-------- -----------------------------------
Date William P. Carey
Chairman of the Executive Committee and Director
03/23/98 BY: /s/ Steven M. Berzin
-------- -----------------------------------
Date Steven M. Berzin
Vice Chairman, Chief Legal Officer and Director
03/23/98 BY: /s/ Gordon F. DuGan
-------- -----------------------------------
Date Gordon F. DuGan
President, Chief Acquisitions Officer and Director
03/23/98 BY: /s/ Donald E. Nickelson
-------- -----------------------------------
Date Donald E. Nickelson
Chairman of the Audit Committee and Director
03/23/98 BY: /s/ Eberhard Faber IV
-------- -----------------------------------
Date Eberhard Faber IV
Director
03/23/98 BY: /s/ Barclay G. Jones, III
-------- -----------------------------------
Date Barclay G. Jones, III
Director
03/23/98 BY: /s/ Dr. Lawrence R. Klein
-------- -----------------------------------
Date Dr. Lawrence R. Klein
Director
03/23/98 BY: /s/ Charles C. Townsend, Jr.
-------- -----------------------------------
Date Charles C. Townsend, Jr.
Director
03/23/98 BY: /s/ Reginald Winssinger
-------- -----------------------------------
Date Reginald Winssinger
Director
03/23/98 BY: /s/ John J. Park
-------- -----------------------------------
Date John J. Park
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
03/23/98 BY: /s/ Claude Fernandez
-------- -----------------------------------
Date Claude Fernandez
Executive Vice President - Financial Operations
(Principal Accounting Officer)
- 18 -
<PAGE> 20
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 2
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
1997 ANNUAL REPORT
<PAGE> 21
SELECTED FINANCIAL DATA
(In thousands except per unit amounts)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 6,666 $ 5,161 $ 5,186 $ 4,591 $ 4,920
Income before
extraordinary item (1) 10,711 1,732 2,596 2,625 3,000
Income before extraordinary
item allocated:
To General Partners 107 17 26 26 30
To Limited Partners 10,604 1,715 2,570 2,599 2,970
Per unit 192.80 31.18 46.75 47.33 54.10
Distributions attributable (2)(3):
To General Partners 21 15 15 14 18
To Limited Partners 16,352 1,447 1,495 2,256 1,804
Per unit 297.31 26.31 27.19 41.11 32.86
Payment of mortgage
principal (4) 1,675 1,617 1,490 937 896
BALANCE SHEET DATA:
Total assets 41,736 40,571 33,123 33,683 33,852
Long-term
obligations (5) 15,758 13,973 939 6,891 6,182
</TABLE>
(1) Income in 1993 includes a $7,857,000 gain on sale of properties and an
extraordinary loss on extinguishment of nonrecourse debt of the disposed
properties of $521,000.
(2) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year. The distribution
attributable to the fourth quarter of 1997 was paid to Limited Partners in
December 1997.
(3) Distributions include special distributions of $260 and $15 per Limited
Partnership Unit in 1993 and 1996, respectively.
(4) Represents scheduled mortgage principal amortization paid.
(5) Represents mortgage obligations due after more than one year.
- 1 -
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Net income for the year ended December 31, 1997, increased by
$375,000 as compared with the prior year. The increase in net income was due to
an increase in lease revenue (rental income and interest income from direct
financing leases) and a decrease in interest expense offset by an increase in
property expense.
The increase in lease revenues was due to the commencement of a
lease with Excel Communications, Inc. in December 1997 at the Partnership's
property in Reno, Nevada, a full year's rental from Sports & Recreation, Inc.
which commenced paying rent in July 1996 on its lease for the property in
Moorestown, New Jersey and 100% occupancy of the Maumelle, Arkansas distribution
facility in 1997. Until entering into the lease with Excel, the Reno property
had been vacant since December 1994. The decrease in interest expense was due to
the refinancing in June 1996 of the mortgage loan collateralized by property
leased to Unisource Worldwide, Inc. at a lower rate of interest and the
continuing amortization of the mortgage loan collateralized by the property
leased to Pre Finish Metals, Incorporated. Property expenses increased due to
the legal costs incurred in pursuing a bankruptcy claim against New Valley
Corporation, the former lessee of the Reno and Moorestown properties and its
termination of such leases in 1993 and 1994. This was partially offset by the
net leasing of both the Reno and Moorestown property for the entire year. The
lessees of the Moorestown and Reno properties are required to pay or reimburse
the Partnership for costs of insurance, real estate taxes and maintenance. Such
costs had previously been paid by the Partnership.
Net income for the year ended December 31, 1996 increased by $29,000
as compared with net income for the prior year. The results for 1995 included
$123,000 from nonrecurring other income items. The increase in income was due to
the decrease in interest expense and was partially offset by decreases in lease
revenues and interest income and by an increase in property expense.
The decrease in interest expense was due to the payoff of the debt
collateralized by the Gibson Greetings, Inc. properties in connection with the
restructuring of the Gibson lease in the fourth quarter of 1995 and the benefit
from the refinancing, in June 1996, of the mortgage loan on the Partnership's
property leased to Unisource. Solely as a result of the Unisource mortgage
refinancing, annual debt service decreased by $305,000. The decrease in lease
revenues was due to the Gibson restructuring which included the severing of a
property from the Gibson master lease, restating the Gibson lease and entering
into a lease agreement for the severed property with Cleo, Inc. The Partnership
received substantial consideration in 1995 for agreeing to the restructuring.
Although the combined rent from the Cleo and Gibson properties decreased as
compared with rents prior to the restructuring, net cash flow (rent less
mortgage debt service) from the Gibson and Cleo properties has remained stable
due to the retirement of the mortgage debt on such properties. The decrease in
lease revenues was partially offset by new leases for the Moorestown, New Jersey
property with Sports & Recreation, Inc. and a new lease with B&G Contract
Packaging, Inc. for 50% of the leasable space at Maumelle. The increase in
property expense was attributable to legal costs incurred in connection with the
Partnership's bankruptcy claim against New Valley and the carrying costs for the
Reno and Moorestown properties as well as paying a portion of the carrying costs
for the Maumelle property prior to the lease with B&G.
Interest expense is expected to continue to decrease as a result of
the full amortization of Pre Finish Metals mortgage loan in 1998 at which time
the Unisource loan will be the Partnership's only mortgage obligation. Lease
revenues are expected to remain stable. Sports & Recreation has paid the rent on
the Moorestown property since the inception of its lease term in July 1996 but
has not occupied the property and does not intend to do so. The Sports &
Recreation lease has an initial term through May 2012 and Sports & Recreation
retains its obligation to pay rent until the end of such term regardless of
whether it occupies the property. The Partnership is cooperating with Sports &
Recreation in seeking a new lessee for the property even though it has no
obligation to do so.
-2-
<PAGE> 23
Because of the long-term nature of the Partnership's net leases,
inflation and changes in prices have not unfavorably affected the Partnership's
net income or had an impact on the continuing operations of the Partnership's
properties. All of the Partnership's net leases have either periodic mandated
rent increases, sales overrides or periodic rent increases based on formulas
indexed to increases in the Consumer Price Index, and may have caps on such CPI
increases. Although increases in the CPI have been relatively moderate over the
past several years, the Partnership should not be significantly impacted as
several of its leases provide for stated rent increases rather than increases
based on CPI formulas.
Financial Condition
The Partnership's cash balances decreased by $129,000 to $938,000.
Cash flow from operations of $3,365,000 was sufficient to pay quarterly
distributions of $1,416,000 and scheduled principal payment installments of
$896,000. In addition, the Partnership paid a distribution of $752,000 in
December 1997 in connection with the Consolidation with Carey Diversified LLC.
In the first quarter of 1997, the Partnership used $426,000 to complete
improvements to retrofit the Reno property and complete its obligation to fund
certain improvements at the inception of the Excel lease. The Partnership and
AT&T Corporation have been discussing funding an expansion of the Partnership's
facility in exchange for a lease extension; however, AT&T and the Partnership
have not entered into any commitment to complete a transaction. In the event
that an agreement is reached, the Partnership's share of capital costs would be
approximately $1,400,000. In addition, if the lease with Sports & Recreation is
terminated, improvements would be necessary for the Moorestown property. The
Partnership will seek to fund a significant portion of any necessary Moorestown
improvements through a lease termination settlement with Sports & Recreation.
The distribution paid in December 1997 was due to an exchange
transaction which occurred on January 1, 1998. The majority of the Partnership's
Limited Partners and its General Partners approved a consolidation by merger of
the Partnership with a subsidiary limited partnership of Carey Diversified LLC,
as proposed in the Consent Solicitation Statement/Prospectus of Carey
Diversified dated October 16, 1997. In connection with the merger, 1,937 Limited
Partnership Unitholders owning 54,227 Limited Partnership Units elected to
exchange their limited partnership units for interests in Carey Diversified. The
December 1997 distribution was intended to (a) distribute funds in order to
adjust the net assets of the Partnership with the estimate of Total Exchange
Value, as defined in the Consent Solicitation Statement/Prospectus, of those
assets, and (b) pay the January distribution.
Limited Partners owning 673 Limited Partnership Units who did not
elect to receive interests in Carey Diversified have elected to retain a limited
partnership interest in the Partnership as a Subsidiary Partnership Unitholder.
Subsidiary Partnership Units have economic interests and legal rights in the
Partnership that are substantially similar to those of Limited Partnership Units
and represent a direct ownership interest in the Partnership. The holder of
Subsidiary Partnership Units will be paid a pro rata share of any distribution
paid by the Partnership to Carey Diversified. The Partnership will continue to
pay distributions on a quarterly basis until liquidating distributions are made,
as described in the Consent Solicitation Statement/Prospectus. The objective
with respect to Subsidiary Partnership Units will be to pay distributions as if
the Consolidation never had occurred based upon the net cash flows generated by
the Partnership.
The Partnership currently has two mortgage loans outstanding: the
Unisource loan which will fully amortize in 2010 and the Pre Finish loan which
will fully amortize in 1998. As a substantial number of the Partnership's
properties are unleveraged, the Partnership has significant borrowing capacity
that can be used, if necessary to fund any potential capital improvement
commitments or build working capital reserves. Management has no current plans
to draw on its borrowing capacity.
Pre Finish has an option to purchase its leased property between June
1998 and 2003. The option is exercisable at the greater of fair market value of
the property or $5,249,000 plus 2-1/2% per annum from December 1980 to the
closing date. The mortgage loan on the Pre Finish property will fully amortize
by June 30, 1998, therefore, the Partnership would not need to use any sales
proceeds to pay off any mortgage debt in the event the option is exercised.
Annual cash flow (rentals less debt service on the mortgage loan) from the Pre
Finish property is currently $331,000. Pre Finish has not given any indication
as to whether it intends to exercise its option. In addition, Cleo has an option
to purchase its leased property at any time with at least six months' notice.
The Partnership's share of the sales proceeds in the event the option is
exercised would range between $4,275,000 and $4,631,000. Annual cash flow from
the Cleo property is $355,000. The Cleo lease provides for an initial term
through December 2005.
-3-
<PAGE> 24
In January 1998, the Partnership and Corporate Property Associate 3,
an affiliate, which together own properties which were formerly leased to New
Valley, were awarded $2,900,000 (of which the Partnership's share is $1,130,000)
in their bankruptcy claim against New Valley. New Valley has filed an appeal to
contest the award, and the Partnership and Corporate Property Associates 3 have
cross-appealed on different issues and are seeking to preserve the award.
Accordingly, there is no assurance that the Partnership will receive the full or
any amount of this award.
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 that require tenants to
indemnify the Partnership against all liabilities and losses related to their
operations at the leased properties. If the Partnership undertakes to clean up
or remediate any of its properties, the General Partner believes that in most
cases the Partnership will be entitled to reimbursement from tenants for such
costs. In the event that the Partnership absorbs a portion of the costs to
comply with environmental statutes, the General Partner believes such
expenditures will not have a material adverse effect on the Partnership's
financial condition, liquidity or results of operations.
In 1994, the Partnership voluntarily conducted Phase II
environmental reviews of certain of its properties based on the results of Phase
I environmental reviews conducted in 1993. The Partnership believes, based on
the results of such 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.
In June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in full set general purpose
financial statements. SFAS No. 130 is required to be adopted by 1998. The
Partnership is currently evaluating the impact, if any, of SFAS No. 130.
The Partnership's management company has responsibility for
maintaining the Partnership's books and records and servicing the computer
systems used in maintaining such books and records. In its preliminary
assessment of Year 2000 issues, the management company believes that such issues
will not have a material effect on the Partnership's operations; however such
assessment has not been completed. The Partnership relies on its bank and
transfer agent for certain computer-related services and has initiated
discussions to determine whether they are addressing Year 2000 issues that might
affect the Partnership.
-4-
<PAGE> 25
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, 1996 and 1997, and the related consolidated
statements of income, partners' capital and cash flows for each of the three
years in the period ended December 31, 1997. We have also audited the financial
statement schedule included on pages 18 to 20 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, 1996 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the Schedule of Real Estate and
Accumulated Depreciation as of December 31, 1997, 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 23, 1998
-5-
<PAGE> 26
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
ASSETS:
Real estate leased to others:
Accounted for under the
operating method:
Land $ 4,850,433 $ 4,850,433
Buildings 12,756,321 13,186,939
------------ ------------
17,606,754 18,037,372
Accumulated depreciation 5,850,679 6,370,139
------------ ------------
11,756,075 11,667,233
Net investment in direct financing leases 20,259,530 20,474,498
------------ ------------
Real estate leased to others 32,015,605 32,141,731
Cash and cash equivalents 1,066,861 937,680
Other assets, net of accumulated amortization of
$3,571 in 1996 and $10,714 in 1997 and net
of reserve for uncollected rents of
$36,435 in 1997 600,057 772,519
------------ ------------
Total assets $ 33,682,523 $ 33,851,930
============ ============
LIABILITIES:
Mortgage notes payable $ 7,787,061 $ 6,891,306
Accrued interest payable 75,233 67,967
Accounts payable and accrued expenses 66,050 213,494
Accounts payable to affiliates 63,447 1,169,349
Prepaid rental income 43,389
Security deposits 283,694 283,694
------------ ------------
Total liabilities 8,275,485 8,669,199
------------ ------------
Commitments and contingencies
PARTNERS' CAPITAL:
General Partners 208,334 (832,266)
Limited Partners (54,900 Limited Partnership
Units issued and outstanding) 25,198,704 26,014,997
------------ ------------
Total partners' capital 25,407,038 25,182,731
------------ ------------
Total liabilities and
partners' capital $ 33,682,523 $ 33,851,930
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
<PAGE> 27
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of INCOME
For the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income $1,717,457 $1,850,494 $2,134,323
Interest income from direct financing leases 3,174,996 2,688,154 2,723,690
Other interest income 170,631 46,177 61,690
Other income 122,720 6,138
---------- ---------- ----------
5,185,804 4,590,963 4,919,703
---------- ---------- ----------
Expenses:
Interest 1,351,797 731,843 542,304
Depreciation 519,891 499,320 519,460
General and administrative 298,974 274,126 305,184
Property expense 402,928 454,044 545,592
Amortization 16,133 6,848 7,143
---------- ---------- ----------
2,589,723 1,966,181 1,919,683
---------- ---------- ----------
Net income $2,596,081 $2,624,782 $3,000,020
========== ========== ==========
Net income allocated to:
Individual General Partner $ 2,596 $ 2,625 $ 3,000
========== ========== ==========
Corporate General Partner $ 23,365 $ 23,623 $ 27,000
========== ========== ==========
Limited Partners $2,570,120 $2,598,534 $2,970,020
========== ========== ==========
Net income per Unit:
(54,975 weighted average Limited
Partnership Units in 1995, 54,900
Limited Partnership Units in 1996 and 1997) $ 46.75 $ 47.33 $ 54.10
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
<PAGE> 28
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Partners' Capital Accounts
------------------------------------------------------------------
Limited
Partners'
General Limited Amount Per
Total Partners Partners Unit (a)
----- -------- -------- ---------
<S> <C> <C> <C> <C>
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
Distributions (2,175,482) (21,755) (2,153,727) (39)
Accrued preferred distribution (1,048,845) (1,048,845)
Net income, 1997 3,000,020 30,000 2,970,020 54
----------- ----------- ----------- ----
Balance, December 31, 1997 $25,182,731 $ (832,266) $26,014,997 $474
=========== =========== =========== ====
</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> 29
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,596,081 $ 2,624,782 $ 3,000,020
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 536,024 506,168 526,603
Noncash rent adjustments (32,043) (199,403) (214,968)
Restructuring fees received, net of costs 3,237,685
Provision for uncollected rents 22,666 36,435
Net change in operating assets and liabilities (196,404) (139,675) 16,992
----------- ----------- ----------
Net cash provided by operating
activities 6,164,009 2,791,872 3,365,082
----------- ----------- -----------
Cash flows from investing activities:
Additional capitalized costs (6,851) (200,808) (430,618)
----------- ----------- -----------
Net cash used in
investing activities (6,851) (200,808) (430,618)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to partners (1,491,667) (2,303,728) (2,167,890)
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 (1,489,763) (936,587) (895,755)
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 (9,765,575) (2,101,709) (3,063,645)
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (3,608,417) 489,355 (129,181)
Cash and cash equivalents, beginning of year 4,185,923 577,506 1,066,861
----------- ----------- -----------
Cash and cash equivalents, end of year $ 577,506 $ 1,066,861 $ 937,680
=========== =========== ===========
Supplemental disclosure of noncash financing activities:
Accrued preferred distribution $ 1,048,845
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-9-
<PAGE> 30
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"). All material inter-entity transactions have been
eliminated.
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
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant
estimates relate to the assessment of recoverability of real estate
assets. 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, rental
revenue is recognized on a straight-line basis over the term of
the leases 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
fair 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.
Continued
-10-
<PAGE> 31
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
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, 1996 and 1997 were held in the
custody of two financial institutions.
Other Assets:
Included in other assets are deferred charges which are costs incurred
in connection with mortgage note refinancings and are amortized over
the terms of the mortgages and deferred costs of Consolidation (see
Note 13) which represent certain costs related to a Consolidation
transaction which have been capitalized. Such Consolidation costs will
be included in the revaluation of assets subsequent to December 31,
1997.
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.
Reclassification:
Certain 1995 and 1996 amounts have been reclassified to conform to the
1997 financial statement presentation.
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 Partnership will terminate on December 31,
2017, or sooner, in accordance with the terms of the Amended Agreement
of Limited Partnership (the "Agreement").
Through December 31, 1997, the Agreement provided that the General
Partners were allocated 1% (1/10 of 1% to the Individual General
Partner, and 9/10 of 1% to the Corporate General Partner, W.P. Carey &
Co., Inc. ("W.P. Carey")), and the Limited Partners were allocated 99%
of the profits and losses as well as distributions of Distributable
Cash From Operations, as defined in the Agreement, and net proceeds
from the sale of Partnership properties. Effective January 1, 1998, as
a result the of merger (see Note 13) of the Partnership with a
subsidiary partnership of Carey Diversified LLC ("Carey Diversified"),
Carey Diversified is the sole general partner of the Partnership.
Carey Diversified and the holders of Subsidiary Partnership Units are
allocated 99% of the profits and losses and distributable cash and two
special limited partners, Carey Management LLC ("Carey Management")
and William P. Carey, are allocated 9/10 of 1% and 1/10 of 1% of the
profits and losses and distributable cash, respectively.
In connection with the merger with Carey Diversified and the listing on
the New York Stock Exchange, the former Corporate General Partner
satisfied the conditions for receiving a subordinated preferred return
of $1,048,845, which was measured based upon the cumulative proceeds
arising from the sale of the Partnership's assets. Such amount has
been included in accounts payable to affiliates as of December 31,
1997. The preferred return, paid in January
Continued
-11-
<PAGE> 32
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATION FINANCIAL STATEMENTS, Continued
1998, was subject to provisions that limited such payment until a
specified cumulative return to limited partners was achieved. The
Exchange Value of a Limited Partnership Unit to a Listed Share of
Carey Diversified was included in calculating the cumulative return.
3. Transactions with Related Parties:
Under the Agreement, a division of W.P. Carey was entitled to receive a
property management fee and reimbursement of certain expenses incurred
in connection with the Partnership's operations. 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. Effective January 1,
1998, the fees and reimbursements are payable to Carey Management, an
affiliate of Carey Diversified. Property management fee and general
and administrative expense reimbursements are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Property management fee $254,174 $101,644 $150,696
General and administrative
expense reimbursements 51,138 51,394 75,994
-------- -------- --------
$305,312 $153,038 $226,690
======== ======== ========
</TABLE>
During 1995, 1996 and 1997, fees aggregating $39,370, $192,086 and
$110,832, respectively, were incurred for legal services performed by
a firm in which the Secretary, until July 1997, 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. Expenses
incurred in 1995, 1996 and 1997 were $51,472, $45,007 and $31,457,
respectively.
The Partnership's ownership interests in certain properties are
jointly held with affiliated entities as tenants-in-common with the
Partnership's undivided 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 $2,184,000 in
1998; $1,732,000 in 1999; $1,749,000 in 2000; $1,750,000 in 2001; and
$1,774,000 in 2002 and aggregate approximately $14,395,000 through
2012.
Contingent rents were approximately $65,000 and $45,000 in 1996 and
1997, respectively. No contingent rents were realized in 1995.
Continued
-12-
<PAGE> 33
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
---- ----
<S> <C> <C>
Minimum lease payments
receivable $34,832,818 $32,324,096
Unguaranteed residual value 22,700,673 22,700,673
----------- -----------
57,533,491 55,024,769
Less, Unearned income 37,273,961 34,550,271
----------- -----------
$20,259,530 $20,474,498
=========== ===========
</TABLE>
Scheduled future minimum rents, exclusive of renewals, under
noncancellable direct financing leases amount to approximately
$2,485,000 in 1998; $2,473,000 in 1999; $2,543,000 in 2000, $2,708,000
in 2001; and $2,229,000 in 2002 and aggregate approximately
$32,324,000 through 2013.
Contingent rents were approximately $149,000 in 1995. No contingent
rents were realized in 1996 and 1997.
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, 1997 of
approximately $18,478,000, before accumulated depreciation. As of
December 31, 1997, mortgage notes payable bear interest at rates of
7.24% and 9.25% per annum. The mortgage notes mature in 1998 and 2010,
respectively.
Scheduled principal payments during each of the next five years
following December 31, 1997 and thereafter are as follows:
Year Ending December 31,
<TABLE>
<CAPTION>
<S> <C>
1998 $ 708,933
1999 370,390
2000 397,943
2001 427,546
2002 459,351
Thereafter 4,527,143
----------
Total $6,891,306
==========
</TABLE>
Interest paid was $1,422,223, $769,023 and $549,570 in 1995, 1996 and
1997, respectively.
Continued
-13-
<PAGE> 34
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Distributions to Partners:
Distributions are declared and paid to partners quarterly and are
summarized as follows:
<TABLE>
<CAPTION>
Distributions Paid
Year Ending and Payable to Distributions Paid to Limited Partners'
December 31, General Partners Limited Partners Per Unit Amount
------------ ---------------- ---------------- ---------------
<S> <C> <C> <C>
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
======= =========== ======
1997 $21,755 $ 2,153,727 $39.23
======= =========== ======
</TABLE>
Distributions for 1997 include distributions of $751,581 to Limited
Partners and $7,592 to General Partners declared in December 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:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income per Statements of Income $2,596,081 $2,624,782 $3,000,020
Excess tax depreciation (612,649) (368,687) (330,341)
Restructuring fee 3,237,685
Other (106,511) (288,538) 14,246
---------- ---------- ----------
Income reported for Federal
income tax purposes $5,114,606 $1,967,557 $2,683,925
========== ========== ==========
</TABLE>
9. Industry Segment Information:
The Partnership's operations consist of the investment in and the
leasing of industrial and commercial real estate.
In 1995, 1996 and 1997, the Partnership earned its total operating
revenues (rental income plus interest income from direct financing
leases) from the following lease obligors:
Continued
-14-
<PAGE> 35
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
1995 % 1996 % 1997 %
---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
Unisource Worldwide, Inc. $1,316,677 27% $1,316,677 29% $1,322,410 27%
Pre Finish Metals Incorporated 937,772 19 967,600 21 968,639 20
Gibson Greetings, Inc. 1,708,392 35 823,776 18 841,090 17
CSS Industries, Inc./Cleo, Inc. 46,763 1 444,576 10 457,891 9
AT&T Corporation 295,728 6 296,066 7 296,050 6
Western Union Financial
Services, Inc. 237,162 5 236,784 5 235,975 5
B & G Contract Packaging, Inc. 126,000 3 235,500 5
Excel Communications, Inc. 2,247 208,965 4
Other 349,959 7 264,375 6 170,400 4
Sports & Recreation, Inc. 60,547 1 121,093 3
---------- ---- ---------- --- ---------- ---
$4,892,453 100% $4,538,648 100% $4,858,013 100%
========== ==== ========== ==== ========== ===
</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 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. Western Union
Financial Services, Inc. leases the Bridgeton property.
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 annual
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 termination
offer. Sports & Recreation has paid all scheduled rents. The
Partnership and CPA(R):3 will evaluate any other termination offers
from Sports & Recreation.
In August 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 Communications, Inc. The initial lease term
commenced on December 26, 1996.
In connection with the bankruptcy claim, the Bankruptcy Court entered a
judgment in January 1998 which awarded the Partnership and CPA(R):3:
$2,900,000 (of which the Partnership's share is $1,130,000) on their
claim. New Valley has elected to appeal the Bankruptcy Court's
judgment to the United States District Court for the District of New
Jersey (Newark). The Partnership and CPA(R):3 have cross-appealed on
different issues and are seeking to preserve the judgment. There is no
assurance that the Partnership will receive the full amount or any of
the judgment. Accordingly, no amount that the Partnership may
ultimately receive has been recorded in the accompanying financial
statements.
Continued
-15-
<PAGE> 36
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. 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. In the event that the
Partnership absorbs a portion of the costs to comply with
environmental statutes, the General Partner believes 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.
12. 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, 1997 and 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.
13. Exchange of Limited Partnership Units:
On October 16, 1997, Carey Diversified distributed a Consent
Solicitation Statement/Prospectus to the Limited Partners that
described a proposal to consolidate the Partnership with the other
CPA(R) Partnerships. The General Partners' proposals that each of the
nine CPA(R) limited partnerships be merged with a corresponding
subsidiary partnership of Carey Diversified, of which Carey
Diversified is the general partner, was approved by the Limited
Partners of all nine of the CPA(R) limited partnerships. Each limited
partner had the option of either exchanging his or her limited
partnership interest for an interest in Carey Diversified ("Listed
Shares") or to retain a limited partnership interest in the subsidiary
partnership ("Subsidiary Partnership Units"). On January 1, 1998,
1,937 holders owning 54,227 of the 54,900 limited partnership units
exchanged such units for 1,516,187 Listed Shares with 29 holders with
the remaining 673 limited partnership units exchanging such units for
Subsidiary Partnership Units. The General Partners received 158,192
Listed Shares for their interest in their share of the appreciation in
Partnership properties.
Continued
-16-
<PAGE> 37
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Listed shares commenced public trading on the New York Stock Exchange on
January 21, 1998. Subsidiary Partnership Units provide substantially
the same economic interest and legal rights as those of a limited
partnership unit in the Partnership, are not listed on a securities
exchange. A liquidating distribution to holders of Subsidiary
Partnership units will be made after an appraisal of the Partnership's
properties which appraisal date is to be no later than December 31,
1998.
14. Accounting Pronouncements:
June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in
full set general purpose financial statements. SFAS No. 130 and is
required to be adopted by 1998. The Partnership is currently
evaluating the impact, if any, of SFAS No. 130.
-17-
<PAGE> 38
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost
Partnership Capitalized Decrease in
----------------------- Subsequent to Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method:
Retail store in
Greensboro, North Carolina $ 40,946 $ 186,926 $ 14,508
Retail store in
New Orleans, Louisiana 129,065 188,599 15,776
Retail store leased to
Kinko's of Ohio, Inc. 47,350 581,034 10,795
Warehouse and distribution
center leased to,
B&G Contract Packaging,
Inc. 216,000 3,048,862 29,922
Land leased to Unisource
Worldwide, Inc. $2,171,572 3,575,000
Building leased to Sports &
Recreation, Inc. 265,757 1,925,029 $(1,030,786)
Centralized telephone bureau
leased to Excel Communi-
cations, Inc. 446,956 1,325,456 624,189 (479,994)
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 364,188 254,400 6,587,930 33,652
---------- ---------- ----------- -------- -----------
$2,535,760 $4,975,474 $13,843,836 $728,842 $(1,510,780)
========== ========== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
--------------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ---- --------- ----- ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating Method:
Retail store in
Greensboro, North Carolina $ 40,946 $ 201,434 $ 242,380 $ 144,402 September 2, 1980 15-35 YRS.
Retail store in
New Orleans, Louisiana 129,065 204,375 333,440 150,795 January 5, 1981 15-35 YRS.
Retail store leased to
Kinko's of Ohio, Inc. 47,350 591,829 639,179 432,315 October 1, 1980 15-35 YRS.
Warehouse and distribution
center leased to,
B&G Contract Packaging,
Inc. 216,000 3,078,784 3,294,784 1,710,911 April 9, 1981 30 YRS.
Land leased to Unisource
Worldwide, Inc. 3,575,000 3,575,000 April 29, 1980
Building leased to Sports &
Recreation, Inc. 140,716 1,019,284 1,160,000 161,386 November 24, 1981 30 YRS.
Centralized telephone bureau
leased to Excel Communi-
cations, Inc. 446,956 1,469,651 1,916,607 105,274 November 24, 1981 30 YRS.
Warehouse and manufac-
turing plant leased to
Pre Finish Metals December 11, 1980 5-30 YRS.
Incorporated 254,400 6,621,582 6,875,982 3,665,056 and June 30, 1986
---------- ----------- ----------- ----------
$4,850,433 $13,186,939 $18,037,372 $6,370,139
========== =========== =========== ==========
</TABLE>
See accompanying notes to Schedule.
-18-
<PAGE> 39
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Partnership Capitalized (Decrease) in
------------------------ Subsequent to Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Direct Financing Method:
Office, warehouse and
distribution center
leased to Unisource
Worldwide, Inc. $4,355,546 $ 7,170,000 $ 9,528 $ 847,262
Centralized Telephone
Bureau leased to
Western Union
Financial Services, Inc. $ 350,316 1,980,820 (36,494)
Computer Center
leased to
AT&T Corporation 144,958 2,739,941 1,183 14,476
Warehouse and
manufacturing
buildings
leased to Gibson
Greetings, Inc. 542,693 4,913,459 (1,548,904)
Warehouse and
manufacturing
buildings
leased to CSS Industries,
Inc./Cleo, Inc. 323,122 4,315,774 (1,293,636)
---------- ---------- ----------- ------- -----------
$4,355,546 $1,361,089 $21,119,994 $10,711 $(2,017,296)
========== ========== =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct Financing Method:
Office, warehouse and
distribution center
leased to Unisource
Worldwide, Inc. $ 8,026,790 April 29, 1980
Centralized Telephone
Bureau leased to
Western Union November 24,
Financial Services, Inc. 2,294,642 1981
Computer Center
leased to November 24,
AT&T Corporation 2,900,558 1981
Warehouse and
manufacturing
buildings
leased to Gibson January 26,
Greetings, Inc. 3,907,248 1982
Warehouse and
manufacturing
buildings
leased to CSS Industries, January 26,
Inc./Cleo, Inc. 3,345,260 1982
-----------
$20,474,498
===========
</TABLE>
See accompanying notes to Schedule.
-19-
<PAGE> 40
CORPORATE PROPERTY ASSOCIATES 2
(a California limited partnership)
and SUBSIDIARIES
NOTES TO SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
(a) Consists of acquisition costs, including legal fees, appraisal fees,
title costs and other related professional fees and capitalized
improvements.
(b) The increase (decrease) in net investment is due to the amortization of
unearned income producing a constant periodic rate of return on the net
investment and does not include lease payments received which at times
may be greater or less than such amortization under the direct
financing method, the writedowns to fair value of the Partnership's
properties in Moorestown, New Jersey and Reno Nevada and adjustments
relating to deferred gains on lease restructurings.
(c) At December 31, 1997, the aggregate cost of real estate owned for
Federal income tax purposes is $42,039,945.
(d)
Reconciliation of Real Estate Accounted
for Under the Operating Method
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
---- ----
<S> <C> <C>
Balance at beginning
of year $17,405,946 $17,606,754
Additions 200,808 430,618
----------- -----------
Balance at close of
year $17,606,754 $18,037,372
=========== ===========
</TABLE>
Reconciliation of Accumulated Depreciation
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
---- ----
<S> <C> <C>
Balance at beginning
of year $5,351,359 $5,850,679
Depreciation expense 499,320 519,460
---------- ----------
Balance at close of
year $5,850,679 $6,370,139
========== ==========
</TABLE>
-20-
<PAGE> 41
PROPERTIES
<TABLE>
<CAPTION>
LEASE TYPE OF OWNERSHIP
OBLIGOR TYPE OF PROPERTY LOCATION INTEREST
------- ---------------- -------- --------
<S> <C> <C> <C>
GIBSON GREETINGS, Land and Manufac- Cincinnati, Ownership of a 28.5%
INC. turing/Warehouse Ohio; and interest in land and
Buildings - 2 locations Berea, Kentucky buildings
CSS INDUSTRIES, Land and Manufac- Memphis, Ownership of a 28.5%
INC./CLEO, INC. turing/Warehouse Tennessee interest in land and
Buildings buildings
UNISOURCE Land and Office/ City of Commerce, Ownership of land
WORLDWIDE, Warehouse/Distri- California and building (1)
INC. bution Center
WESTERN UNION Land and Bridgeton, Ownership of an
FINANCIAL SERVICES, Centralized Missouri approximate 39%
INC. Telephone Bureau interest in land
and buildings
SPORTS & Land and Moorestown, Ownership of an
RECREATION, INC. Building New Jersey approximate 39%
interest in land
and building
AT&T CORPORATION Land and a Bridgeton, Ownership of an
Computer Center Missouri approximate 39%
interest in land
and building
EXCEL Land and Reno, Nevada Ownership of an
COMMUNICATIONS, Building approximate 39%
INC. interest in land
and building
PRE FINISH METALS Land and Warehouse/ Walbridge, Ohio Ownership of a 40%
INCORPORATED Manufacturing Plant interest in land
and building (1)
B&G CONTRACT Land and Warehouse/ Maumelle, Ownership of land
PACKAGING, INC. Distribution Center Arkansas and building
WEXLER & WEXLER Land and Retail New Orleans, Ownership of land
Store Louisiana and building
A. JONES Land and Retail Greensboro, Ownership of land
Store North Carolina and building
KINKOS OF OHIO, INC. Land and Retail Store Canton, Ohio Ownership of land
and LUTZ BAGELS, LLC and building
</TABLE>
(1) These properties are encumbered by mortgage notes payable.
-21-
<PAGE> 42
MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED
UNITHOLDER MATTERS
As of December 31, 1997, there were 1,966 holders of record of the
Limited Partnership Units of the Partnership. On January 1, 1998, 1,937 holders
of Limited Partnership Units exchanged such units for interests in Carey
Diversified LLC and 29 holders exchanged such units for Subsidiary Partnership
Units. There is no established public trading market for Subsidiary Partnership
Units.
In accordance with the requirements of the Partnership's Amended
Agreement of Limited Partnership (the "Agreement") contained as Exhibit A to the
Prospectus, the Corporate General Partner expects to continue to make quarterly
distributions of Distributable Cash From Operations as defined in the Agreement.
The following table shows the frequency and amount of distributions paid per
Unit since 1994:
<TABLE>
<CAPTION>
Cash Distributions Per Unit
------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
First quarter $ 6.60 $ 6.94 $ 6.37
Second quarter 6.66 22.03(a) 6.38
Third quarter 6.75 6.35 6.39
Fourth quarter 6.84 6.36 20.09(b)
------ ------ ------
$26.85 $41.68 $39.23
====== ====== ======
</TABLE>
(a) Includes a special distribution of $15 per Limited Partnership Unit.
(b) Includes distributions of $6.40 and $13.69 per Limited Partnership Unit paid
in October 1997 and December 1997, respectively.
On October 16, 1997, the Partnership began the solicitation of
consents from limited partners to approve the merger of the Partnership with all
of the CPA(R) Partnerships into Carey Diversified LLC, a Delaware limited
liability company. Limited Partners were offered the opportunity to vote to
approve or disapprove the merger and to choose either interests ("Listed
Shares") in the Carey Diversified LLC or interests ("Subsidiary Partnership
Units") in the partnership which survived the merger. The solicitation period
ended on December 16, 1997. The results of the voting were as follows:
<TABLE>
<CAPTION>
Units Voted Units Voted Units Voted Units Not
Yes No Abstaining Voted
--- -- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merger of Partnership
with Carey Diversified 39,100 71.22% 764 1.40% 260 .47% 14,776 26.91%
</TABLE>
<TABLE>
<CAPTION>
Subsidiary
Listed Shares Partnership Units
------------- -----------------
<S> <C> <C>
Number of Units
Electing 54,227 673
</TABLE>
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedle contains summary financial information extracted from Form 10-K for
the year ended December 31, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 937,680
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 937,680
<PP&E> 38,511,870
<DEPRECIATION> 6,370,139
<TOTAL-ASSETS> 33,851,930
<CURRENT-LIABILITIES> 1,777,893
<BONDS> 6,891,306
0
0
<COMMON> 0
<OTHER-SE> 25,182,731
<TOTAL-LIABILITY-AND-EQUITY> 33,851,930
<SALES> 0
<TOTAL-REVENUES> 4,919,703
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,340,944
<LOSS-PROVISION> 36,435
<INTEREST-EXPENSE> 542,304
<INCOME-PRETAX> 3,000,020
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,000,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,000,020
<EPS-PRIMARY> 54.10
<EPS-DILUTED> 54.10
</TABLE>
