<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended DECEMBER 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________________to___________________
Commission file number 0-15778
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.
<PAGE> 2
PART II
Item 8. Consolidated Financial Statements and Supplementary Data.
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 1995 and 1996.
(iii) Consolidated Statements of Income for the years ended December 31,
1994, 1995 and 1996. (iv) Consolidated Statements of Partners' Capital
for the years ended December 31, 1994, 1995 and 1996.
(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 -
<PAGE> 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 -
<PAGE> 4
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
ASSETS:
Real estate leased to others:
Accounted for under the
operating method:
Land $ 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
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 7 -
<PAGE> 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
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
(Continued)
- 8 -
<PAGE> 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
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 9 -
<PAGE> 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
<TABLE>
<CAPTION>
Partners' Capital Accounts
---------------------------------------------------------------------
Limited
Partners'
General Limited Amount Per
Total Partners Partners Unit (a)
----- -------- -------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $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
=========== ========= =========== ====
</TABLE>
(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 -
<PAGE> 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
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
============ ============ ===========
</TABLE>
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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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 -
<PAGE> 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:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
<S> <C> <C>
Minimum lease payments receivable $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
=========== ===========
</TABLE>
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 -
<PAGE> 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:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C> <C>
1997 $ 6,846,625
1998 3,468,203
-----------
Total $10,314,828
===========
</TABLE>
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 -
<PAGE> 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:
<TABLE>
<CAPTION>
Limited
Year Ending Distributions Paid Distributions Paid Partners' Per
December 31, to General Partners to Limited Partners Unit Amount
------------ ------------------- ------------------- -----------
<S> <C> <C> <C>
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
======== =========== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ==========
</TABLE>
Continued
- 17 -
<PAGE> 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:
<TABLE>
<CAPTION>
1994 % 1995 % 1996 %
---- --- ---- --- ---- --
<S> <C> <C> <C> <C> <C> <C>
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%
========== ==== ========== ==== ========== ====
</TABLE>
(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:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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 -
<PAGE> 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:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
