-----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, C9A+qk9YwiWreuMvpnBSXmif3GJhYzW1klmA6R00vo4Bpgxcuy3D6Yb4ck1eGd+k 20ABOuFFlpKqPhrn2uXzaw== 0000950123-97-007560.txt : 19970912 0000950123-97-007560.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950123-97-007560 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 7 CENTRAL INDEX KEY: 0000789459 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133327950 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-15778 FILM NUMBER: 97675202 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 7 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 0-15778 CORPORATE PROPERTY ASSOCIATES 7, A CALIFORNIA LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) CALIFORNIA 13-3327950 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (Address of principal executive offices) (Zip Code) 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. Consolidated Financial Statements and Supplementary Data. (i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 1995 and 1996. (iii) Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996. (iv) Consolidated Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. (iv) Consolidated Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (vi) Notes to Consolidated Financial Statements. - 8 - 3 REPORT of INDEPENDENT ACCOUNTANTS To the Partners of Corporate Property Associates 7 - a California limited partnership and Subsidiaries: We have audited the accompanying consolidated balance sheets of Corporate Property Associates 7 - a California limited partnership and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule included on pages 23 to 26 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 consolidated financial position of Corporate Property Associates 7 - a California limited partnership and Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the financial information required to be included therein pursuant to Securities and Exchange Commission Regulation S-X Rule 12-28. /s/Coopers & Lybrand L.L.P. New York, New York March 21, 1997 - 6 - 4 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1996
1995 1996 ---- ---- ASSETS: Real estate leased to others: Accounted for under the operating method: Land $ 6,552,033 $ 6,552,033 Buildings 25,296,740 25,501,944 ----------- ----------- 31,848,773 32,053,977 Accumulated depreciation 6,185,070 7,031,430 ----------- ----------- 25,663,703 25,022,547 Net investment in direct financing leases 15,542,368 15,542,368 ----------- ----------- Real estate leased to others 41,206,071 40,564,915 Operating real estate, net of accumulated depreciation of $3,762,695 in 1995 and $4,070,423 in 1996 8,343,020 8,254,274 Real estate held for sale 543,138 Cash and cash equivalents 4,968,410 5,591,985 Other assets, net of accumulated amortization of $148,276 in 1995 and $185,402 in 1996 1,167,905 1,020,950 ----------- ------------ Total assets $56,228,544 $55,432,124 =========== =========== LIABILITIES: Mortgage notes payable $11,928,751 $10,314,828 Note payable 9,606,837 9,606,837 Accrued interest payable 345,418 324,737 Accounts payable and accrued expenses 708,394 676,737 Accounts payable to affiliates 102,020 113,485 Prepaid and deferred income 428,827 371,116 ----------- ----------- Total liabilities 23,120,247 21,407,740 ----------- ----------- Commitments and contingencies PARTNERS' CAPITAL: General Partners 110,512 161,740 Limited Partners (45,209 Limited Partnership Units issued and outstanding in 1995 and 1996) 32,997,785 33,862,644 ----------- ----------- Total partners' capital 33,108,297 34,024,384 ----------- ----------- Total liabilities and partners' capital $56,228,544 $55,432,124 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. - 7 - 5 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES CONSOLIDATED STATEMENTS of INCOME For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ---- ---- ---- Revenues: Rental income $ 3,862,385 $ 4,298,952 $ 4,351,678 Interest income from direct financing leases 3,537,977 2,283,445 2,258,757 Other interest income 346,970 203,166 266,400 Other income 1,271,691 143,866 Revenues of hotel operations 4,821,029 5,410,689 5,710,627 ----------- ----------- ----------- 13,840,052 12,196,252 12,731,328 ----------- ----------- ----------- Expenses: Interest 3,537,640 2,456,129 1,942,737 Depreciation 1,619,726 1,361,952 1,154,088 General and administrative 412,173 600,271 439,399 Property expenses 317,277 299,608 550,201 Amortization 78,528 70,067 62,500 Writedown to net realizable value 641,731 319,685 Operating expenses of hotel operations 3,528,257 4,016,639 4,129,149 ----------- ----------- ----------- 10,135,332 9,124,351 8,278,074 ----------- ----------- ----------- Income before loss from equity investment, gains on sale, discontinued operations and extraordinary item 3,704,720 3,071,901 4,453,254 Loss from equity investment 152,617 135,621 128,879 ----------- ----------- ----------- Income before gains on sale, discontinued operations and extraordinary item 3,552,103 2,936,280 4,324,375 Gains on sale of real estate, net 7,814,474 1,019,362 74,729 Gains on sale of securities 682,500 ----------- ---------- ----------- Income from continuing operations 12,049,077 3,955,642 4,399,104 Earnings from discontinued operations 456,272 246,847 ----------- ----------- ---------- Income before extraordinary items 12,505,349 4,202,489 4,399,104
(Continued) - 8 - 6 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES CONSOLIDATED STATEMENTS of INCOME, Continued For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ---- ---- ---- Extraordinary gain (loss) on extinguishment of debt (511,503) 1,323,858 ----------- ----------- ----------- Net income $11,993,846 $ 5,526,347 $ 4,399,104 =========== =========== =========== Net income allocated to: Individual General Partner $ 140,990 $ 55,263 $ 43,991 =========== =========== =========== Corporate General Partner $ 286,822 $ 225,350 $ 216,218 =========== =========== =========== Limited Partners $11,566,034 $ 5,245,734 $ 4,138,895 =========== =========== =========== Net income per Unit: (45,274 Limited Partnership Units in 1994, 45,242 weighted average Limited Partnership Units in 1995 and 45,209 Limited Partnership Units in 1996): Income from continuing operations $ 256.62 $ 83.31 $ 91.55 Discontinued operations 9.47 5.13 Extraordinary items (10.62) 27.51 ----------- ----------- ----------- $ 255.47 $ 115.95 $ 91.55 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. - 9 - 7 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES CONSOLIDATED 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 $29,311,433 $(119,976) $29,431,409 $651 Distributions (3,246,729) (194,804) (3,051,925) (67) Net income, 1994 11,993,846 427,812 11,566,034 255 ----------- --------- ----------- ---- Balance, December 31, 1994 38,058,550 113,032 37,945,518 839 Distributions (10,434,626) (283,133) (10,151,493) (224) Purchase of Limited Partner Units (41,974) (41,974) (1) Net income, 1995 5,526,347 280,613 5,245,734 116 ----------- --------- ------------ ---- Balance, December 31, 1995 33,108,297 110,512 32,997,785 730 Distributions (3,483,017) (208,981) (3,274,036) (73) Net income, 1996 4,399,104 260,209 4,138,895 92 ----------- --------- ----------- ---- Balance, December 31, 1996 $34,024,384 $161,740 $33,862,644 $749 =========== ========= =========== ====
(a) Based on weighted average Units issued and outstanding during the periods. The accompanying notes are an integral part of the consolidated financial statements. - 10 - 8 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ---- ---- ---- Cash flows from operating activities: Net income $ 11,993,846 $ 5,526,347 $ 4,399,104 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,698,254 1,432,019 1,216,588 Extraordinary (gain) loss on extinguishment of debt 511,503 (1,323,858) Net gains on sales (8,496,974) (1,019,361) (74,729) Noncash consideration received in connection with settlements (346,105) Cash receipts on operating leases greater than income recognized 40,807 170,647 170,647 Writedown to net realizable value 641,731 319,685 Amortization of deferred income (60,930) (21,514) (21,514) Loss from equity investment 152,617 135,621 128,879 Deferred rental income recognized in connection with disposition of properties (811,101) Restructuring fees collected 722,222 Net change in operating assets and liabilities, net of disposition of food service assets (698,639) (129,810) (319,902) ------------ ------------ ----------- Net cash provided by operating activities 5,347,231 5,089,776 5,499,073 ------------ ------------ ----------- Cash flows from investing activities: Additional capitalized costs (164,292) (180,758) (424,186) Proceeds from sales 19,257,324 4,148,903 617,867 Distributions received from equity investment 38,281 31,457 27,761 ------------ ------------ ----------- Net cash provided by investing activities 19,131,313 3,999,602 221,442 ------------ ------------ ---------- Cash flows from financing activities: Distributions to partners (3,246,729) (10,434,626) (3,483,017) Payments of mortgage principal (739,391) (1,567,369) (613,923) Prepayments of mortgage payable (12,763,584) (2,602,884) (1,000,000) Purchase of Limited Partnership Units (41,974) Deferred financing costs, net of reimbursement 6,292 Payments in connection with extinguishment of debt (469,550) ------------ ------------ ----------- Net cash used in financing activities (17,212,962) (14,646,853) (5,096,940) ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents 7,265,582 (5,557,475) 623,575 Cash and cash equivalents, beginning of year 3,260,303 10,525,885 4,968,410 ------------ ------------ ----------- Cash and cash equivalents, end of year $ 10,525,885 $ 4,968,410 $ 5,591,985 ============ ============ ===========
The 1995 extraordinary gain on extinguishment of debt of $1,323,858 was comprised of $1,215,566 forgiveness of principal and $108,292 of accrual interest thereon. The accompanying notes are an integral part of the consolidated financial statements. - 11 - 9 CORPORATE PROPERTY ASSOCIATES 7 - 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 7, a wholly-owned subsidiary, which was dissolved in December 1995, and a 99% owned subsidiary (collectively, the "Partnership"). Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Leased to Others: Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Partnership diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States. The leases are accounted for under either the direct financing or operating methods. Such methods are described below: Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the lease. Operating method - Real estate is recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. 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 net realizable value. Continued - 12 - 10 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Depreciation: Depreciation is being computed using the straight-line method over the estimated useful lives of the 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 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: Included in other assets are deferred rental income, deferred charges and an investment in a limited partnership. Deferred rental income is the aggregate difference for operating method leases between scheduled rents which vary during the lease term and income recognized on a straight-line basis. Deferred charges are primarily costs incurred in connection with mortgage note financings and refinancings and are deferred and amortized on a straight-line basis over the terms of the mortgages. The Partnership's 50% interest in a limited partnership is accounted for under the equity method, i.e. at cost, increased or decreased by the Partnership's share of earnings or losses, less distributions. Deferred Rental Income: Deferred rental income recognized in connection with consideration received in entering into lease modifications is being amortized on a straight-line basis from the date of the amendments through the end of the initial terms of the leases or date of sale, if sooner. Income Taxes: A partnership is not liable for Federal income taxes as each partner recognizes his proportionate share of the partnership income or loss in his tax return. Accordingly, no provision for income taxes is recognized for financial statement purposes. 2. Partnership Agreement: The Partnership was organized on February 3, 1986 under the Revised 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 100 Limited Partnership Units in connection with the Partnership's public offering. The Partnership will terminate on December 31, 2010, 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, Seventh Carey Corporate Property, Inc.) and the Limited Partners are allocated 94% of the profits and losses as well as distributions of Distributable Cash From Operations, as defined, except as described below. Continued - 13 - 11 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of Partnership assets. Pursuant to the subordination provisions of the Agreement, the preferred return may be paid only after the limited partners receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return of 8% since the inception of the Partnership. The General Partners interest in such preferred return amounts to $805,015 based upon the cumulative proceeds from the sale 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 were allocated a portion of the 1993 and 1994 gains on sale as well as a portion of the related tax gains in order to eliminate their negative balances. The Partnership paid a special distribution of $6,859,697 in 1995 related to the sales which was allocated 1% to the Individual General Partner and 99% to the Limited Partners in accordance with the Agreement. 3. Transactions with Related Parties: Under the Agreement, W.P. Carey & Co., Inc. ("W.P. Carey") and other affiliates are also entitled to receive property management and leasing fees 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 for the operation of the Partnership. Property management and leasing fees and general and administrative expense reimbursements incurred are summarized as follows:
1994 1995 1996 ---- ---- ---- Property management and leasing fees $135,794 $102,753 $101,181 General and administrative expense reimbursements 113,171 123,492 110,024 -------- -------- -------- $248,965 $226,245 $211,205 ======== ======== ========
During 1994, 1995 and 1996, fees aggregating $23,426, $67,230 and $66,717 respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner. The Partnership is a participant in an agreement with W.P. Carey and other affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Partnership's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and 1996 were $51,874, $90,569 and $73,823, respectively. The increase in 1995 was due, in part, to certain nonrecurring costs incurred in connection with the relocation of the Partnership's offices. The Partnership's ownership interests in certain properties are jointly held with affiliated entities as tenants-in-common or limited partners with the Partnership's interests in such jointly held properties ranging from 24.74% to 65.5172%. The Partnership accounts for its assets and liabilities relating to tenants-in-common interests on a proportional basis. Continued - 14 - 12 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 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 $3,606,000 in 1997, $2,726,000 in 1998, $2,705,000 in 1999, $2,576,000 in 2000, $2,339,000 in 2001 and aggregate approximately $20,425,000 through 2013. Contingent rents were approximately $139,000, $138,000 and $106,000 in 1994, 1995 and 1996, respectively. B. Operating Real Estate: Operating real estate, at cost, is summarized as follows:
December 31, ------------ 1995 1996 ---- ---- Land $ 2,050,688 $ 2,050,688 Building 8,250,352 8,651,587 Personal property 1,804,675 1,622,422 ----------- ----------- 12,105,715 12,324,697 Less, Accumulated depreciation 3,762,695 4,070,423 ----------- ----------- $ 8,343,020 $ 8,254,274 =========== ===========
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 $31,518,276 $29,710,372 Unguaranteed residual value 15,542,368 15,542,368 ----------- ----------- 47,060,644 45,252,740 Less, Unearned income 31,518,276 29,710,372 ----------- ----------- $15,542,368 $15,542,368 =========== ===========
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to approximately $1,890,000 in each of the years 1997 to 2001 and aggregate approximately $29,710,000 through 2014. Contingent rents were approximately $490,000, $322,000 and $344,000 in 1994, 1995 and 1996, respectively. Future minimum ground lease commitments for certain properties occupied by AutoZone, Inc. ("AutoZone") aggregate $843,000 through 2005. Continued - 15 - 13 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 6. Mortgage Notes Payable and Note Payable: A. Mortgage Notes Payable: Mortgage notes payable, all of which are nonrecourse to the Partnership and the partners, are collateralized by real property with a carrying amount of approximately $23,244,595, before accumulated depreciation and the assignment of various leases. As of December 31, 1996, mortgage notes payable bear interest at rates varying from 9.03% to 11.25% per annum and mature in 1997 and 1998. Scheduled principal payments, including balloon payments, are as follows:
Year Ending December 31, 1997 $ 6,846,625 1998 3,468,203 ----------- Total $10,314,828 ===========
B. Note Payable: The $9,606,837 note payable is a recourse obligation of the Partnership and provides for quarterly payments of interest at a floating rate equal to the London Inter-Bank Offered Rate ("LIBOR") plus 4.25% per annum (9.81% at December 31, 1996). The note payable matures in July 1999, at which time a balloon payment for the entire outstanding principal will be due. Covenants under the credit agreement include a requirement that the Partnership may not incur any additional debt unless the new debt replaces existing debt and does not exceed a maximum nonrecourse debt limitation at the inception of the loan of $36,897,696 less an adjustment for subsequent scheduled principal amortization on existing nonrecourse loans plus closing costs of any new nonrecourse loans. Additionally, the Partnership must maintain certain debt coverage ratios and maintain a minimum consolidated net worth and aggregate appraised property value of $15,000,000. The debt coverage ratio requires the Partnership to maintain ratios of free operating cash flow to the debt service on the note ranging from 3:1 to 3.4:1 over the term of the agreement. The Partnership is in compliance with such terms at December 31, 1996. The credit agreement requires the Partnership to offer the lender the proceeds from property sales as a prepayment of the note payable. The lender has not accepted any mandatory prepayment offers. Interest paid on all debt obligations was $3,426,650, $2,467,322 and $1,963,418 in 1994, 1995 and 1996, respectively. Continued - 16 - 14 CORPORATE PROPERTY ASSOCIATES 7 - 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:
Limited Year Ending Distributions Paid Distributions Paid Partners' Per December 31, to General Partners to Limited Partners Unit Amount ------------ ------------------- ------------------- ----------- 1994 $194,804 $ 3,051,925 $ 67.41 ======== =========== ======= 1995: Quarterly distributions $214,536 $ 3,360,393 $ 74.25 Special distribution - Note 12 68,597 6,791,100 150.00 -------- ----------- ------- $283,133 $10,151,493 $224.25 ======== =========== ======= 1996 $208,981 $ 3,274,036 $ 72.42 ======== =========== =======
Distributions of $52,750 to the General Partners and $826,421 to the Limited Partners for the quarter ended December 31, 1996 were declared and paid in January 1997. 8. Income for Federal Tax Purposes: Income for financial statement purposes differs from income for Federal income tax purposes, because of the difference in the treatment of certain items for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows:
1994 1995 1996 ---- ---- ---- Net income per Consolidated Statements of Income $11,993,846 $ 5,526,347 $4,399,104 Excess tax depreciation (825,140) (549,851) (485,963) Difference in tax treatment of gains on sales of real estate 2,645,850 (1,889,176) 56,628 Writedown to net realizable value 641,731 319,685 Other (861,038) 44,808 (302,371) ----------- ----------- ---------- Net income reported for Federal income tax purposes $13,595,249 $ 3,451,813 $3,667,398 =========== =========== ==========
Continued - 17 - 15 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 9. Industry Segment Information: The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate and the operation of a food service facility and a hotel business. In 1994, 1995 and 1996, the Partnership earned its total commercial and industrial leasing revenues (rental income plus interest income from financing leases) from the following lease obligors:
1994 % 1995 % 1996 % ---- --- ---- --- ---- -- Advanced System Applications, Inc. $1,145,003 15% $1,578,632 24% $1,542,918 23% The Gap, Inc. 927,568 13 927,568 14 927,568 14 KSG, Inc. 785,273 11 832,566 13 820,096 13 Sybron Acquisition Company 819,162 11 819,162 13 819,162 13 Swiss M-Tex, L.P. 518,774 7 546,095 8 526,266 8 AutoZone, Inc. 462,076 6 466,473 7 441,191 7 CSK Auto, Inc. (formerly Northern Automotive, Inc.) (1) 388,763 5 388,830 6 388,830 6 Various other obligors 411,893 6 387,445 6 346,678 5 NVRyan L.P. 310,807 4 291,556 4 291,556 4 NYNEX Corporation 215,600 3 215,600 3 215,600 3 United States Postal Service 162,100 2 Winn-Dixie Stores, Inc. 128,470 2 128,470 2 128,470 2 Mid-Continent Bottlers, Inc. 1,286,973 17 ---------- ---- ---------- ---- ---------- ---- $7,400,362 100% $6,582,397 100% $6,610,435 100% ========== ==== ========== ==== ========== ====
(1) Rental income is net of ground lease rental expense of $97,000, $101,000 and $103,000 in 1994, 1995 and 1996, respectively (see Note 5). The summarized results of the Partnership's share of the hotel operations are as follows:
1994 1995 1996 ---- ---- ---- Revenues $ 4,821,029 $ 5,410,689 $ 5,710,627 Fees paid to hotel management company (136,412) (112,423) (127,474) Other operating expenses (3,391,845) (3,904,216) (4,001,675) ----------- ----------- ------------ Hotel operating income $ 1,292,772 $ 1,394,050 $ 1,581,478 =========== =========== ===========
10. Discontinued Operations: On December 20, 1995, the Partnership sold the food service facility in Jupiter, Florida, at which it operated a restaurant, for $4,140,000, recognizing a gain on the sale of $1,019,362. In connection with the sale, it satisfied the two mortgage note obligations on the property and recognized an extraordinary gain on extinguishment of debt of $1,323,858. Continued - 18 - 16 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued In January 1994, the terms of the loan collateralized by the property were modified by dividing the loan into two notes with balances of $2,700,000 ("Note A") and $1,082,883 ("Note B"), respectively. Under the modification, interest and principal payments on Note B were deferred. In accordance with the terms of the 1994 loan modification agreement, the $1,082,883 balance of Note B plus accrued interest thereon was forgiven upon payment of Note A, resulting in an extraordinary gain of $1,323,858 on extinguishment of debt. The Partnership used a portion of the sales proceeds to pay off the $2,603,000 balance of Note A. In connection with the sale of the Jupiter property, the Partnership did not incur any gain or loss on the disposal of the food service business. Results for the food service operation business segment for 1994 and 1995 have been presented as discontinued operations and are as follows:
1994 1995 ---- ---- Net sales $ 4,035,009 $ 3,821,631 Cost of goods sold (1,181,181) (1,165,386) Other operating expenses (2,397,556) (2,409,398) ----------- ----------- $ 456,272 $ 246,847 =========== ===========
11. Hotel Property in Livonia, Michigan: In November 1987, the Partnership and Corporate Property Associates 6 ("CPA(R):6"), an affiliate, purchased a Holiday Inn in Livonia, Michigan as tenants-in-common with 65.5172% and 34.4828% interests, respectively, and entered into a net lease with Brock Hotel Corporation which subsequently changed its name to Integra - A Hotel and Restaurant Company ("Integra"). Integra subsequently assigned its interest in the lease to a wholly-owned subsidiary, Livonia Inn Management, Inc., while Integra remained the guarantor of the lease. As a result of Integra's financial condition, the subsidiary stopped paying rent in May 1992 with Integra subsequently filing a voluntary bankruptcy petition in July 1992. Both of these events were defaults under the lease as well as the mortgage note collateralized by the Livonia property. In August 1992, pursuant to a letter of agreement, the Partnership and CPA(R):6 assumed control of the hotel operations. In March 1994, the Partnership and CPA(R):6, executed a settlement agreement with the Hallwood Group, Inc. ("Hallwood Group"), Integra's largest shareholder, under which the Partnership and CPA(R):6 agreed to surrender a promissory note made by Hallwood Group, which had been pledged by Integra to the Partnership and CPA(R):6 as additional security to Integra's lease obligation, in exchange for $150,000 in cash, a $500,000 promissory note from Hallwood Group and an equity participation having a potential value of up to $500,000 from the Hallwood Group. The $500,000 note bears interest at 8% per annum and matures no later than March 8, 1998 and, subject to certain conditions, is redeemable at an earlier date. The note is collateralized by the Hallwood Group's pledge of 89,269 of its limited partnership units of Hallwood Realty Partners, L.P. ("Hallwood Realty"), a publicly traded limited partnership. The pledged units represent 5.2% of all outstanding limited partnership units of Hallwood Realty. Under the settlement agreement, the Hallwood Group has the obligation to pay to the Partnership and CPA(R):6 an amount equal to 25% of the increase in value of the Hallwood Realty units of up to $500,000, from March 1994 to the note maturity date. If the price per unit increases to $45 or greater, the Partnership and CPA(R):6 may, subject to certain restrictions, receive a payment from Continued - 19 - 17 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued the Hallwood Group representing the 25% appreciation of the pledged units prior to the note maturity date. At December 31, 1996, the pledged limited partner units had a market value of $24 1/2 per unit. The Partnership's share of the cash proceeds and the note receivable of $425,862 are included in other income in 1994. During 1996, the Partnership and CPA(R):6 received $221,000 (of which the Partnership share was $144,000) from the bankruptcy trustee in partial settlement of the Partnership's and CPA:6's claim against Integra. 12. Gains on Sales: In October 1994, the Partnership sold its properties leased to Mid-Continent Bottlers, Inc. ("Mid-Continent") to the lessee for $17,800,000 and sold its 3.29% limited partnership interest in Midcon Bottlers, L.P., an affiliate of Mid-Continent, for $700,000. In connection with the sales, the Partnership recognized gains of $7,814,474 and $682,500, respectively. The Partnership used $3,895,320 of the sales proceeds to satisfy the Mid-Continent mortgage loan. In addition, the Partnership used a portion of the proceeds to prepay certain mortgage loans on properties which remain subject to leases. In January 1995, the Partnership used a portion of the proceeds to pay a special distribution to limited partners of $6,791,100 ($150 per Limited Partnership Unit) and $68,597 to a general partner. As more fully described in Note 10, the Partnership recognized a gain of $1,019,362 on the sale of the Jupiter, Florida property in December 1995. On February 12, 1996, the Partnership sold a property located in Denham Springs, Louisiana to its lessee, AutoZone, Inc. ("AutoZone"), for $431,779, net of selling costs, realizing a gain of $74,729 on the sale. AutoZone's lease allows it to offer to sever properties from its leases and purchase such properties which it judges to be unsuitable. In connection with the sale of the property, pursuant to the lease, and severing it from the lease, annual rent from AutoZone will be reduced by $40,766. On February 14, 1996, the Partnership sold a property in Monte Vista, Colorado which had previously been leased to Yellow Front Stores, Inc. for $186,090, net of selling costs. As the property was written down to a net realizable value at December 31, 1995 to an amount equal to the net sales proceeds, no gain or loss was recognized on the sale. Annual rent from the Monte Vista property was $20,000. Continued - 20 - 18 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued In August 1994, the Partnership and Corporate Property Associates 8, L.P. ("CPA(R):8") sold a property formerly leased to NVRyan in Jefferson, Georgia for $844,778 (of which the Partnership's share was $312,880), net of costs. In addition, the Partnership and CPA(R):8 sold the property in Plant City, Florida in April 1994 to an NVRyan sublessee for $1,200,000 (of which the Partnership's share was $444,444). No gain or loss was recognized on the sales as the properties were written down prior to the sales to an amount equal to the estimated sales proceeds. A writedown of $484,296 was recognized on the Jefferson property in 1994 and a writedown was recognized on the Plant City property in 1993. In June 1994, the Partnership and CPA(R):8 an affiliate, entered into a contract to sell the vacant Fredricksburg, Virginia property for $728,500 (of which the Partnership's share was $269,815), net of costs. Subsequently, the potential buyer withdrew its offer to buy the Fredricksburg, Virginia property. Although the transaction was not consummated, the Partnership's interest in the property was written down in 1994 by $157,433 to an amount equal to the anticipated net proceeds. 13. Extraordinary Gains and Losses on Extinguishment of Debt: As fully described in Note 10, in connection with the sale of the Jupiter, Florida property in December 1995, the Partnership recognized an extraordinary gain on extinguishment of debt of $1,323,858. In December 1994, the Partnership paid off $1,886,148 of the mortgage loan on the AutoZone and NYNEX Corporation properties. In connection with paying off the mortgage loan, the Partnership incurred an extraordinary charge of $136,260 on the extinguishment of debt consisting of a prepayment charge of $94,307 and the writeoff of $41,953 in unamortized financing costs. In December 1994, the Partnership, through a newly formed subsidiary, paid off mortgage loans of $4,587,600 and $1,902,158 on The Gap, Inc. ("Gap") and KSG, Inc. ("KSG") properties, respectively. In connection with the paying off of the Gap mortgage loan, the Partnership incurred a prepayment charge of $375,243, resulting in an extraordinary charge on the extinguishment of debt. 14. Properties Leased to Advanced System Applications, Inc.: The Partnership and CPA(R):8 own property in Bloomingdale, Illinois, as tenants-in-common with 33.64% and 66.36% ownership interests, respectively which is leased to Advanced System Applications, Inc. ("ASA"). In July 1994 the Partnership and CPA(R):8 agreed to a lease modification agreement. Under the modification agreement, the scheduled expiration of the lease was changed to June 1997 from June 2003 in exchange for an increase in the rent to $5,200,000 from $1,850,000. As this modification required the mortgage lender's consent, the mortgage loan payments were substantially increased so that the loan fully amortized on March 1, 1996. Although ASA is obligated to make its lease payments through June 1997, it is in the process of vacating the property. ASA had been entitled to one-third of all rentals received for any new leases on space ASA had vacated; however, under a subsequent modification agreement, the Partnership and CPA(R):8 agreed to reduce ASA's annual rent by $833,333 in exchange for ASA's assignment of all subtenant rents to the Partnership and CPA(R):8 and relinquishing its rights to any of the rents on the United State Postal Service (the "Postal Service") lease. ASA was also released from bearing the costs of insurance, maintenance and real estate taxes on the property. Continued - 21 - 19 CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued The Postal Service lease has a 10-year lease term which commenced May 1, 1996 at an annual rent of $722,800 (of which the Partnership's share is $243,150), increasing to $822,800 after five years. The Partnership and CPA(R):8 bear the obligation to provide maintenance and support services to the lessee. The lease also provides for rent escalations in 1998 based on increases in certain operating costs incurred by the Partnership and CPA(R):8. In addition, the Postal Service will reimburse the Partnership and CPA(R):8 for its pro rata share of real estate taxes. The Postal Service has an option to terminate the lease after five years and right of first refusal on space vacated by ASA. As provided for under the lease, the Partnership and CPA(R):8 funded a tenant improvement allowance of approximately $600,000 (of which the Partnership's share was $202,000) for improvements to the space occupied by the Postal Service. 15. Disclosures About Fair Value of Financial Instruments: The carrying amounts of cash, accounts receivable and amounts 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 approximately the carrying amount of such mortgage notes at December 31, 1996. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates which take into account the credit of the tenants and interest rate risk. The Partnership's note payable is a variable rate obligation indexed to the LIBOR. Accordingly, the carrying amount of the note payable approximates fair value as of December 31, 1996. - 22 - 20 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 7 - a California limited partnership and SUBSIDIARIES BY: SEVENTH CAREY CORPORATE PROPERTY, INC. 09/03/97 BY: /s/ Steven M. Berzin ------- -------------------- Date Claude Fernandez Executive Vice President and Chief Financial Officer (Principal Financial Officer) 09/03/97 BY: /s/ Claude Fernandez ------- -------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) - 23 - -----END PRIVACY-ENHANCED MESSAGE-----