-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fiii5kNNX/jentsnPqPrT2oLd93uGyYXc5os+0XDpRDNSX+AjHxjJeY6weQnzys3 CNUAd7m29mO1j1Xi/DzygQ== 0000950123-97-007556.txt : 19970912 0000950123-97-007556.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950123-97-007556 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970904 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE PROPERTY ASSOCIATES 5 CENTRAL INDEX KEY: 0000718075 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133164925 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-11948 FILM NUMBER: 97675191 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 10-K405/A 1 CORPORATE PROPERTY ASSOCIATES 5 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the quarterly period ended DECEMBER 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-11948 CORPORATE PROPERTY ASSOCIATES 5 (Exact name of registrant as specified in its charter) CALIFORNIA 13-3164925 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 492-1100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP UNITS (Title of Class) (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of deliquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of Registrant: There is no active market for Limited Partnership Units. 2 PART II Item 8. Financial Statements and Supplementary Data. (i) Report of Independent Accountants. (ii) Balance Sheets as of December 31, 1995 and 1996. (iii) Statements of Income for the years ended December 31, 1994, 1995 and 1996. (iv) Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. (v) Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (vi) Notes to Financial Statements. -7- 3 REPORT of INDEPENDENT ACCOUNTANTS To the Partners of Corporate Property Associates 5: We have audited the accompanying balance sheets of Corporate Property Associates 5 (a California limited partnership) as of December 31, 1995 and 1996, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule included on pages 22 to 25 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 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 audits 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 financial position of Corporate Property Associates 5 (a California limited partnership) as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the financial information required to be included therein pursuant to Securities and Exchange Commission Regulation S-X Rule 12-28. /s/Coopers & Lybrand L.L.P. New York, New York March 21, 1997 -6- 4 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) BALANCE SHEETS December 31, 1995 and 1996
1995 1996 ------------ ------------ ASSETS: Real estate leased to others: Accounted for under the operating method: Land $ 4,722,767 $ 3,960,767 Buildings 34,271,786 22,753,408 ------------ ------------ 38,994,553 26,714,175 Accumulated depreciation 12,371,727 9,111,827 ------------ ------------ 26,622,826 17,602,348 Net investment in direct financing leases 19,352,938 19,298,726 ------------ ------------ Real estate leased to others 45,975,764 36,901,074 Operating real estate, net of accumulated depreciation of $4,265,218 in 1995 and $4,637,421 in 1996 7,735,809 7,463,300 Real estate held for sale 10,388,398 Cash and cash equivalents 2,300,682 5,237,995 Funds in escrow 2,977,622 575,051 Other assets, net of accumulated amortization of $130,589 and reserve for uncollected rent of $165,164 in 1995 2,890,127 2,474,117 ------------ ------------ Total assets $ 72,268,402 $ 52,651,537 ============ ============ LIABILITIES: Mortgage notes payable $ 36,065,145 $ 14,283,940 Note payable to affiliate 1,151,000 1,151,000 Accrued interest payable 170,877 45,707 Accounts payable and accrued expenses 572,267 433,842 Accounts payable to affiliates 144,553 111,526 Deferred gains, net of accumulated amortization of $245,788 in 1995 and $180,278 in 1996 1,366,593 901,390 Other liabilities 1,051,904 658,542 ------------ ------------ Total liabilities 40,522,339 17,585,947 ------------ ------------ Commitments and contingencies PARTNERS' CAPITAL: General Partners (262,961) (67,666) Limited Partners (113,200 Limited Partnership Units issued and outstanding) 32,009,024 35,133,256 ------------ ------------ Total partners' capital 31,746,063 35,065,590 ------------ ------------ Total liabilities and partners' capital $ 72,268,402 $ 52,651,537 ============ ============
The accompanying notes are an integral part of the financial statements. -7- 5 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) STATEMENTS of INCOME For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ----------- ----------- ----------- Revenues: Rental income $ 5,606,618 $ 4,642,686 $ 3,225,129 Interest income from direct financing leases 5,805,643 3,879,125 3,409,166 Other interest income 117,325 307,951 210,913 Revenue of hotel operations 6,595,570 6,768,268 6,359,758 Other income 170,107 ----------- ----------- ----------- 18,125,156 15,768,137 13,204,966 ----------- ----------- ----------- Expenses: Interest 4,534,425 3,495,872 2,075,230 Depreciation 2,181,422 2,065,781 1,331,028 General and administrative 571,189 841,920 460,948 Property expenses 1,516,194 810,581 579,189 Amortization 63,932 33,599 13,301 Writedown to net realizable value 1,980,550 1,300,000 Operating expense of hotel operations 4,959,699 5,241,370 4,952,959 ----------- ----------- ----------- 13,826,861 14,469,673 10,712,655 ----------- ----------- ----------- Income before gains on sale 4,298,295 1,298,464 2,492,311 Gains on sale of real estate, net 1,140,891 614,234 5,284,165 ----------- ----------- ----------- Net income $ 5,439,186 $ 1,912,698 $ 7,776,476 =========== =========== =========== Net income allocated to: Individual General Partner $ 171,409 $ 52,520 $ 119,855 =========== =========== =========== Corporate General Partner $ 832,262 $ 148,208 $ 342,857 =========== =========== =========== Limited Partners $ 4,435,515 $ 1,711,970 $ 7,313,764 =========== =========== =========== Net income per Limited Partnership Unit (113,200 Units outstanding) $ 39.18 $ 15.12 $ 64.61 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. -8- 6 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) STATEMENTS of PARTNERS' CAPITAL For the years ended December 31, 1994, 1995 and 1996
Partners' Capital Accounts --------------------------------------------------------------- Limited Partners' General Limited Amount Per Total Partners Partners Unit (a) ------------ ------------ ------------ ------------ Balance, December 31, 1993 $ 38,311,475 $ (746,920) $ 39,058,395 $ 345 Distributions (5,862,314) (351,738) (5,510,576) (49) Net income, 1994 5,439,186 1,003,671 4,435,515 39 ------------ ------------ ------------ ------------ Balance, December 31, 1994 37,888,347 (94,987) 37,983,334 335 Distributions (8,054,982) (368,702) (7,686,280) (68) Net income, 1995 1,912,698 200,728 1,711,970 15 ------------ ------------ ------------ ------------ Balance, December 31, 1995 31,746,063 (262,961) 32,009,024 282 Distributions (4,456,949) (267,417) (4,189,532) (37) Net income, 1996 7,776,476 462,712 7,313,764 65 ------------ ------------ ------------ ------------ Balance, December 31, 1996 $ 35,065,590 $ (67,666) $ 35,133,256 $ 310 ============ ============ ============ ============
(a) Based on 113,200 Units issued and outstanding during all periods. The accompanying notes are an integral part of the financial statements. -9- 7 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) STATEMENTS of CASH FLOWS For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 5,439,186 $ 1,912,698 $ 7,776,476 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,245,354 2,099,380 1,344,329 Amortization of deferred gains (71,609) (71,678) (64,974) Cash receipts on operating and financing leases greater than straight-line adjustments and amortization of unearned income 8,388 13,162 54,212 Writedown to net realizable value 1,980,550 1,300,000 Net gain on sale of real estate (1,140,891) (614,234) (5,284,165) Net change in operating assets and liabilities (187,595) (631,808) 480,432 ------------ ------------ ------------ Net cash provided by operating activities 6,292,833 4,688,070 5,606,310 ------------ ------------ ------------ Cash flows from investing activities: Issuance of note receivable (188,910) Additional capitalized costs (407,538) (1,078,951) (172,447) Proceeds on sale and transfer of real estate 16,939,000 3,387,362 18,592,329 Purchase of limited partnership interests (1,750,175) ------------ ------------ ------------ Net cash provided by investing activities 16,342,552 558,236 18,419,882 ------------ ------------ ------------ Cash flows from financing activities: Distributions to partners (5,862,314) (8,054,982) (4,456,949) Release of escrow funds in connection with mortgage prepayment 2,295,000 Prepayments of mortgage payable (10,413,985) (2,200,000) (18,561,812) Payments on mortgage principal (725,239) (463,487) (365,118) Partial prepayment of note payable to affiliate (144,000) Deferred financing costs (1,247) (10,000) ------------ ------------ ------------ Net cash used in financing activities (17,002,785) (10,872,469) (21,088,879) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 5,632,600 (5,626,163) 2,937,313 Cash and cash equivalents, beginning of year 2,294,245 7,926,845 2,300,682 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 7,926,845 $ 2,300,682 $ 5,237,995 ============ ============ ============
Supplemental Schedule of noncash investing and financing activity: In connection with the sales of properties, purchasers assumed a mortgage loan obligation of $2,854,275 and accrued interest thereon of $12,049 in 1996 and a mortgage loan obligation of $720,401 and accrued interest thereon of $5,780 in 1995 in lieu of paying cash. The accompanying notes are an integral part of the financial statements. -10- 8 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Leased to Others: Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. Corporate Property Associates 5 (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 - Under this method, real estate is recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. When scheduled rents vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent. The Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of undiscounted cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value. Substantially all of the Partnership's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides. Operating Real Estate: Land, buildings and personal property are carried at cost. Major renewals and improvements are capitalized to the property accounts, while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed currently. Real Estate Held for Sale: Real estate held for sale is accounted for at the lower of cost or fair value less cost of sale. Depreciation: Depreciation is being computed using the straight-line method over the estimated useful lives of components of the particular properties, which range from 5 to 30 years. Cash Equivalents: The Partnership considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash Continued -11- 9 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Partnership's cash and cash equivalents at December 31, 1995 and 1996 were held in the custody of three financial institutions. Other Assets and Liabilities: Included in other assets are deferred charges incurred in connection with mortgage note financings and refinancings and an investment in a limited partnership. Deferred charges are amortized on a straight-line basis over the terms of the mortgages. The Partnership's 17.5% investment in an unaffiliated limited partnership is accounted for under the cost method, i.e., income is recorded based on distributions received from net accumulated earnings. Included in other liabilities is deferred rental income for the aggregate difference on an operating method lease between scheduled rents which vary during the lease term and rent recognized on a straight-line basis. Deferred Gains: Deferred gains consist of assets acquired in excess of liabilities assumed in connection with acquiring the operations of a hotel property in Rapid City, South Dakota and certain funds received in connection with the two loan refinancings. The deferred gain from the refinancings is being amortized on a straight-line basis over 24 years. The deferred gain on acquisition had been amortized on a straight-line basis on a 20-year schedule until sale of the property in October 1996, at which time the remaining unamortized gain was recognized. 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. Reclassifications: Certain 1994 and 1995 amounts have been reclassified to conform to the 1996 financial statement presentation. 2. Partnership Agreement: The Partnership was organized on April 12, 1983 under the Uniform Limited Partnership Act of the State of California for the purpose of engaging in the business of investing in and leasing industrial and commercial real estate. The Corporate General Partner purchased 200 Limited Partnership Units in connection with the Partnership's public offering. All the Units were sold prior to December 21, 1983, at which time the offering terminated. The Partnership will terminate on December 31, 2005, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement"). The Agreement provides that the General Partners are allocated 6% (1% to the Individual General Partner, William P. Carey, and 5% to the Corporate General Partner, Carey Corporate Property, Inc.) and the Limited Partners are allocated 94% of the profits and losses, except as described below, as well as distributions of Distributable Cash From Operations, as defined. The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of Partnership assets. Pursuant to the subordination provisions of the Agreement, the preferred return may be paid after the limited partners receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return Continued -12- 10 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued of 6% since the inception of the Partnership. The General Partners interest in such preferred return amounts to $1,422,844 based upon the cumulative proceeds from the sale of assets since the inception of the Partnership through December 31, 1996. The Partnership's ability to satisfy the subordination provisions of the Agreement may not be determinable until liquidation of a substantial portion of the Partnership's assets has been made, formal plans of liquidation are adopted or limited partnership units are converted to other securities which provide the security holder with greater liquidity than a limited partnership unit. Management believes that as of the report date, ultimate payment of the preferred return is reasonably possible but not probable, as defined pursuant to Statement of Financial Accounting Standards No. 5. In accordance with the Agreement, the General Partners, due to having negative capital balances at the beginning of each year, were allocated a portion of the 1994, 1995 and 1996 gains on sale of property as well as the related tax gain in order to reduce their negative balances. The Partnership paid a special distribution in 1995 of proceeds from a property sale which distribution was allocated 1% to the Individual General Partner and 99% to the Limited Partners in accordance with the Agreement. 3. Transactions with Related Parties: The Partnership holds a 65% interest as tenants-in-common in hotel properties in Alpena and Petoskey, Michigan with Corporate Property Associates 6 ("CPA(R):6"), an affiliate which owns the remaining 35% interest. The Partnership accounts for its interest in the Alpena and Petoskey properties on a proportional basis. Under the Agreement, W.P. Carey & Co., Inc. ("W.P. Carey") and other affiliates are also 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. Property management fee and general and administrative expense reimbursements are summarized as follows:
1994 1995 1996 ---- ---- ---- Property management fee $156,947 $116,825 $ 76,763 General and administrative expense reimbursements 178,840 117,584 113,288 -------- -------- -------- $335,787 $234,409 $190,051 ======== ======== ========
During 1994, 1995 and 1996, fees aggregating $339,112, $180,242 and $91,265 respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner. The mortgage loans on the Alpena and Petoskey properties consist of tax-exempt bond obligations of $7,330,000 for each property of which the Partnership's share of each is $4,764,500. The bonds are also collateralized by mortgage and/or lease assignments on eight other Partnership properties. In the event of default, the bondholders have recourse to the Partnership's collateral to the full extent of the outstanding balance of the bonds including the portion of the obligation applicable to CPA(R)6. In connection with restructuring the bond obligation in 1992, the Partnership received cash and other consideration from CPA(R)6. Continued -13- 11 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued The Partnership is a participant in an agreement with W.P. Carey and other affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Partnership's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and 1996 were $76,426, $182,843 and $83,533, respectively. Net expenses in 1995 included certain nonrecurring items. 4. Real Estate Leased to Others Accounted for Under the Operating Method and Operating Real Estate: A. Real Estate Leased to Others: Scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to approximately $2,850,000 in 1997, $2,822,000 in 1998, $2,647,000 in 1999, $1,077,000 in both of the years 2000 and 2001, and aggregate approximately $16,650,000 through 2010. Contingent rents were approximately $106,000, $5,000 and $6,000 in 1994, 1995 and 1996, respectively. B. Operating Real Estate: Operating real estate, at cost, is summarized as follows:
December 31, ------------ 1995 1996 ----------- ----------- Land $ 479,050 $ 479,050 Buildings 9,603,750 9,603,750 Personal property 1,918,227 2,017,921 ----------- ----------- 12,001,027 12,100,721 Less: Accumulated depreciation 4,265,218 4,637,421 ----------- ----------- $ 7,735,809 $ 7,463,300 =========== ===========
5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, ------------ 1995 1996 ----------- ----------- Minimum lease payments receivable $34,887,327 $32,483,668 Unguaranteed residual value 17,495,677 17,495,677 ----------- ----------- 52,383,004 49,979,345 Less: Unearned income 33,030,066 30,680,619 ----------- ----------- $19,352,938 $19,298,726 =========== ===========
Scheduled future minimum rents, exclusive of renewals, under noncancellable financing leases amount to approximately $2,585,000 in each of the years from 1997 to 2001 and aggregate approximately $32,484,000 through 2017. Continued -14- 12 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued Contingent rents were approximately $995,000, $758,000 and $776,000 in 1994, 1995 and 1996, respectively. 6. Mortgage Notes Payable and Note Payable to Affiliate: A. Mortgage Notes Payable The Partnership's mortgage notes payable are limited recourse obligations and are collateralized by lease assignments and by real property with a carrying amount of approximately $32,914,000, before accumulated depreciation (also see Note 3). As of December 31, 1996, mortgage notes payable bear interest at rates varying from 6.6% to 10% per annum and mature from 1997 to 2015. Scheduled principal payments during each of the next five years following December 31, 1996 and thereafter, including a mortgage loan subject to acceleration, are as follows:
Year Ending December 31, ------------------------ 1997 $ 4,988,940 1998 253,500 1999 266,500 2000 286,000 2001 312,000 Thereafter 8,177,000 ----------- Total $14,283,940 ===========
B. Note Payable to Affiliate: A note payable to CPA(R):6 of $1,151,000 provides for payments of interest only at a rate of 13.48% per annum through August 1, 1999, at which time the interest rate will reset to the Applicable Federal Rate (as defined in the Internal Revenue Code of 1986). The note, which is a recourse obligation of the Partnership, matures on May 1, 2012, at which time a balloon payment for any unpaid principal is due. The note may be prepaid in part or whole at any time. Interest paid on mortgage notes payable and the note payable to affiliate was $4,642,849, $3,554,413 and $2,254,150 in 1994, 1995 and 1996, respectively. 7. Distributions to Partners: Distributions declared and paid to partners are summarized as follows:
Limited Year Ending Distributions Paid to Distributions Paid to Partners' Per December 31, General Partners Limited Partners Unit Amount ------------ --------------------- --------------------- ------------- 1994 $ 351,738 $5,510,576 $48.68 ========== ========== ====== 1995: Quarterly distributions $ 345,833 $5,422,280 $47.90 Special distribution 22,869 2,264,000 20.00 ---------- ---------- ------ Total 1995 $ 368,702 $7,686,280 $67.90 ========== ========== ====== 1996 $ 267,417 $4,189,532 $37.01 ========== ========== ======
Distributions of $61,056 to the General Partners and $956,540 to the Limited Partners for the quarter ended December 31, 1996 were declared and paid in January 1997. Continued -15- 13 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 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:
1994 1995 1996 ------------ ------------ ------------ Net income per Statements of Income $ 5,439,186 $ 1,912,698 $ 7,776,476 Excess tax depreciation (2,979,063) (2,399,357) (1,980,182) Writedowns of assets 1,980,550 1,300,000 Difference in gains or losses on dispositions of property 8,776,856 (157,203) 3,475,585 Other (351,394) 284,878 (544,552) ------------ ------------ ------------ Income reported for Federal income tax purposes $ 10,885,585 $ 1,621,566 $ 10,027,327 ============ ============ ============
9. Industry Segment Information: The Partnership's operations consist primarily of the investment in and the leasing of industrial and commercial real estate and the operations of three hotel properties. In 1994, 1995 and 1996, the Partnership earned its total leasing revenues (rental income plus interest income from financing leases) from the following lease obligors:
1994 % 1995 % 1996 % ----------- ----------- ----------- ----------- ----------- ----------- Gould, Inc. $ 1,125,000 10% $ 1,132,500 13% $ 1,215,000 18% Spreckels Industries, Inc. 880,264 8 1,020,717 12 1,020,717 15 DeVlieg Bullard, Inc. 830,984 7 830,984 10 912,864 14 Arley Merchandise Corporation 600,000 5 600,000 7 600,000 9 Exide Electronics Corporation 485,726 4 528,926 6 572,130 9 Penn Virginia Corporation 498,750 5 498,750 6 498,750 8 Stoody Deloro Stellite, Inc. 380,325 3 404,719 5 390,068 6 GATX Logistics, Inc. 1,834,350 16 1,398,600 16 380,730 6 Harcourt General Corporation 233,750 2 233,750 3 233,750 4 Rochester Button Company 204,743 2 199,968 2 225,706 3 Penberthy Products, Inc. 182,529 2 182,529 2 200,514 3 Winn Dixie Stores, Inc. 191,534 2 191,534 2 191,534 3 Sunds Defibrator Woodhandling, Inc. (formerly FMP/Rauma Company) 124,430 1 131,033 2 144,239 2 Other 146,342 1 212,383 2 31,602 IBM Corporation 318,097 3 318,097 4 16,691 Industrial General Corporation 1,385,643 12 637,321 8 Pace Membership Warehouse, Inc. 601,718 5 Liberty Fabrics of New York 1,388,076 12 ----------- ----------- ----------- ----------- ----------- ----------- $11,412,261 100% $ 8,521,811 100% $ 6,634,295 100% =========== =========== =========== =========== =========== ===========
Continued -16- 14 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued The Partnership's share of the operating results for the three hotel properties are as follows:
1994 1995 1996 ----------- ----------- ----------- Revenues $ 6,595,570 $ 6,768,268 $ 6,359,758 Fees to hotel management company (131,911) (143,498) (134,872) Other operating expenses (4,827,788) (5,097,872) (4,818,087) ----------- ----------- ----------- Hotel operating income $ 1,635,871 $ 1,526,898 $ 1,406,799 =========== =========== ===========
10. Rochester Button Company: In June 1992, the Partnership and Rochester Button Company ("RBC") entered into restructuring and lease modification agreements for properties leased by RBC in South Boston and Kenbridge, Virginia. Under the restructuring agreement, the Partnership agreed to exchange a $300,000 subordinated promissory note from RBC for 300 shares of preferred stock ($1,000 par value, 5%). In January 1994, the Partnership agreed to lend $250,000 to RBC at an annual interest rate of 9% evidenced by a subordinated promissory note. In 1995, the Partnership incurred a charge of $288,910 in writing off the note receivable and preferred stock as a result of RBC experiencing financial difficulties and its inability to pay dividends and debt service installments in a timely manner. The Partnership had previously written down the investment in the preferred stock. In addition, the Partnership incurred charges on uncollected rents of $165,164 and $235,314 for the years ended December 31, 1995 and 1996, respectively. On December 30, 1996, the Partnership entered into a new lease agreement with RBC and agreed to forgive all previously uncollected rents. The lease amendment provides for a reduction of annual rent from $286,000 to $180,000. Additionally, RBC granted the Partnership warrants which are exercisable at any time prior to December 31, 2006, to purchase up to 273.5 shares of RBC common stock, representing 40% of the outstanding common stock of RBC, at an exercise price of $18.28 per share prior to December 31, 2006. The South Boston and Kenbridge properties are pledged as collateral for $400,000 of bond financings issued to RBC by industrial development authorities. Continued -17- 15 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 11. Funds in Escrow: Funds in escrow at December 31, 1995 and 1996 consist of reserves and escrow funds for the hotel properties and related mortgage debt.
December 31, ------------ 1995 1996 ---------- ---------- Security reserve on Rapid City property $1,895,000 Debt service escrow account and bond reserves on Alpena and Petoskey properties 412,100 $ 490,100 Hotel furniture, fixture and equipment reserves 270,522 84,951 Special escrow accounts on Rapid City hotel property 400,000 ---------- ---------- $2,977,622 $ 575,051 ========== ==========
12. Gains and Losses on the Sale of Real Estate: Pace Membership Warehouse, Inc.: On November 10, 1994, Pace Membership Warehouse, Inc. ("Pace"), purchased its leased property in Tampa, Florida from the Partnership for $7,000,000. A portion of the Partnership's proceeds from the sale was used to satisfy the remaining $3,290,437 mortgage balance on the Tampa property. In connection with the sale, the Partnership recognized a gain of $2,027,891. Industrial General Corp.: In August 1985, the Partnership purchased from and net leased to Industrial General Corporation ("IGC") and certain of its wholly-owned subsidiaries, seven properties located in Elyria and Bellville, Ohio; Forrest City and Bald Knob, Arkansas; Carthage, New York; and Newburyport, Massachusetts. Subsequent to the purchase, the Partnership agreed to exchange the Saginaw property for an expansion of the Newburyport facility, severed the Carthage property from the lease and entered into a lease with FMP/Rauma Company ("FMP"). In December 1994, the Partnership sold the Forrest City property for $650,000 and recognized a loss of $887,000. In July 1995, IGC filed a voluntary petition of bankruptcy under Chapter 11 of the United States Bankruptcy Code. In connection with an asset acquisition of the plastics division of IGC, on September 14, 1995, the Partnership entered into a series of transactions which resulted in the termination of the IGC lease, the sale of the Bald Knob, Bellville and Newburyport properties and the full satisfaction of the mortgage loan obligation collateralized by all of the IGC properties and the FMP property which had been scheduled to mature on September 1, 1995. In connection with the sale of the Bald Knob property to IGC, the Partnership received cash of $987,362 and IGC, with the consent of the mortgage lender, assumed a mortgage obligation from the Partnership of $720,401 and accrued interest thereon of $5,780. Additionally, IGC agreed to pay an additional $200,000 in installments to the Partnership of which $185,000 had been received as of December 31, 1996. The Bellville and Newburyport properties were sold for $2,400,000 in cash to G.I. Plastek Industrial Properties Limited Partnership ("Plastek Properties"), an affiliate of G.I. Plastek Limited Partnership ("Plastek") which acquired the assets of the IGC plastics division. Continued -18- 16 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued The Partnership used $2,200,000 of the proceeds to pay off the remaining balance on the matured mortgage loan obligation on the IGC and FMP properties. In connection with the sale of the three properties, the Partnership realized a loss of $1,719,828. The Partnership also purchased limited partnership interests in Plastek. The Partnership made capital contributions of $175 and $1,750,000 for Class A and Class B limited partnership interests, respectively. The Class A interest provides for a 17.5% participation in the profits and losses of Plastek after payment of preferred returns to Class B interests. Class B interests are entitled to a cumulative preferred return of 10% on their contributions; however, it does not participate in nor receive other allocations of any gains or losses of Plastek. The Class B interest is redeemable on September 8, 2000. As of December 31, 1996, the Partnership has not received any distributions. The Partnership retains ownership of the Elyria property. In 1995, based on the appraised value of the property and the costs that would need to be incurred to prepare the property for sale or lease after IGC vacated, the Partnership wrote off the value of the property and recognized a charge of $691,640. The Elyria property is presently leased to InnoTech Industries, Inc. through April 1998 for an annual rental of $60,000. Liberty Fabrics of New York: In January 1984, the Partnership purchased properties in Gordonsville, Virginia and in North Bergen, New Jersey and entered into a net lease with Liberty Fabrics of New York ("Liberty"). In December 1993, Liberty notified the Partnership of its intention to exercise its purchase option on the properties. Pursuant to the lease, the purchase price would be the greater of $7,000,000, the Partnership's purchase price for the property, or fair market value as encumbered by the lease. On December 29, 1994, the Partnership and Liberty terminated the lease and agreed that the properties would be transferred to Liberty for $9,359,000, subject to a final determination of the fair value of the property. Liberty would have the right within 30 days of the determination to rescind the transfer, in which case all proceeds would be returned to Liberty, title of the properties transferred back to the Partnership and Liberty would pay all rents in arrears for the period from the initial transfer of title if the fair market value was determined to be greater than $9,359,000. The final determination was made with no adjustment made to the fair market value thereby completing the sale. As a result, the Partnership recognized a gain of $2,334,062 in 1995 on the sale of the properties. Rapid City Hotel: In 1985, the Partnership purchased a hotel in Rapid City, South Dakota, which it operated as a Holiday Inn, with $6,800,000 of tax-exempt bonds which were supported by a letter of credit issued by a third party. In September 1994, the Partnership was advised by Holiday Inn that it would need to upgrade the hotel's physical plant by January 1997 in order to meet the requirements of a modernization plan adopted by Holiday Inn or surrender its Holiday Inn license. As the cost of such upgrade was estimated to be $1,925,000, Management concluded that such additional investment would not justify compliance with the modernization plan. Although Management was considering an affiliation with another national hotel chain, earnings were expected to decline after any change in affiliation. Continued -19- 17 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued In 1995, under an agreement with the issuer of the letter of credit supporting the $6,800,000 tax-exempt mortgage bond on the Rapid City property, the Partnership agreed to use its best efforts to sell the hotel property in exchange for an extension of the letter of credit from October 1995 to October 1997. Annual cash flow from the hotel (hotel earnings, adjusted for depreciation and amortization, less debt service on the tax-exempt bonds) for 1995, the last full year of operations, was $305,000. In 1995, the Partnership reevaluated the net realizable value of the property and recognized a noncash charge of $1,000,000 on the writedown. In the second quarter of 1996, the Partnership charged an additional $1,300,000 as a writedown to net realizable value to an amount Management believed would approximate the proceeds from a sale. On October 1, 1996, the Partnership sold the property and the operating assets and liabilities of the hotel for $4,105,000. The Partnership recognized a gain of $784,618 on the sale. The bond was paid off by utilizing the net proceeds from the sale, $302,000 of cash and various escrow accounts which had been held by the bond trustee or issuer of the letter of credit. The gain includes the recognition of the release of unamortized deferred gains relating to the acquisition of the hotel operation in 1991 from the former lessee. Helena, Montana Office Building : In May 1985, the Partnership purchased an office building in Helena, Montana and was assigned an existing net lease with IBM Corporation ("IBM") as lessee. In 1992, the lease with IBM and the mortgage loan on the property were modified at which time IBM reduced its occupancy from 100% to 40% of the leasable space. The Partnership subsequently leased the remaining space to various other tenants. On January 19, 1996, the Partnership sold the property for $4,800,000 including the purchaser's assumption of the existing mortgage loan on the property. Net of closing costs, the Partnership received cash proceeds of $1,741,261, assigned the mortgage loan obligation of $2,854,275 and accrued interest thereon of $12,049 to the purchaser and recognized a gain of $90,356 on the sale. GATX Logistics, Inc.: In June 1985, the Partnership purchased a warehouse property in Hodgkins, Illinois leased to General Motors Corporation ("GM"). In November 1993, GM terminated its lease and the Partnership entered into a short-term lease with GATX Logistics, Inc.("GATX"). Subsequently, in November 1994, GATX and the Partnership entered into a new lease which provided for a five-year term and a renewal term of five years at GATX's option. On April 9, 1996, the Partnership sold the Hodgkins property for $13,200,000 and assigned the GATX lease, as lessor, to the purchaser. Net of costs and amounts necessary to pay the remaining $3,208,526 balance on the property's mortgage loan, the Partnership received cash proceeds of $9,428,270 and recognized a gain on sale of $4,409,191. Continued -20- 18 CORPORATE PROPERTY ASSOCIATES 5 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 13. Environmental Matters: All of the Partnership's properties, other than the hotel properties are currently leased to corporate tenants, all of which are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. The costs for remediation, which are expected to be performed and paid by the affected tenant, are not expected to be material. In the event that the Partnership absorbs a portion of any costs because of a tenant's failure to fulfill its obligations, the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations. In 1994, based on the results of Phase I environmental reviews performed in 1993, the Partnership voluntarily conducted Phase II environmental reviews on certain of its properties. The Partnership believes, based on the results of Phase I and Phase II reviews, that its leased 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 surface spills from facility activities and leakage from underground storage tanks. For those conditions which were identified, the Partnership advised the affected tenants of the Phase II findings and of their obligations to perform required remediation. 14. Disclosure on 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 mortgage notes payable approximates $13,914,000 at December 31, 1996. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates which take into account the credit of the tenants and interest rate risk. The carrying amount of the Partnership's limited partnership investment in Plastek, which interest was purchased in September 1995 and which is accounted for under the cost method, approximates fair value. -21- 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 5 (a California limited partnership) BY: CAREY CORPORATE PROPERTY, INC. 09/3/97 BY: /s/ Steven M. Berzin - --------------- ------------------------------- Date Claude Fernandez Executive Vice President and Chief Financial Officer (Principal Financial Officer) 09/3/97 BY: /s/ Claude Fernandez - --------------- ------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) -22- -----END PRIVACY-ENHANCED MESSAGE-----