Item 1. Business. ---------
Registrant is engaged in the business of investing in commercial and industrial real estate properties which are net leased to commercial and industrial entities. Registrant was organized as a California limited partnership on February 3, 1986. The General Partners of Registrant are Seventh Carey Corporate Property, Inc. (the "Corporate General Partner"), a Delaware corporation, and William Polk Carey (the "Individual General Partner"). The Corporate General Partner is 79.9% owned by W. P. Carey & Co., Inc. ("W.P. Carey") and 20.1% owned by the Individual General Partner. Affiliates of the Corporate General Partner and the Individual General Partner are also the General Partners of affiliates of Registrant, Corporate Property Associates ("CPA(R):1"), Corporate Property Associates 2 ("CPA(R):2"), Corporate Property Associates 3 ("CPA(R):3"), Corporate Property Associates 4, a California limited partnership ("CPA(R):4"), Corporate Property Associates 5 ("CPA(R):5"), Corporate Property Associates 6 - a California limited partnership ("CPA(R):6"), Corporate Property Associates 8, L.P., a Delaware limited partnership ("CPA(R):8"), Corporate Property Associates 9, L.P., a Delaware limited partnership ("CPA(R):9"), and the advisor of Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional Properties Incorporated ("CIP(TM)") and Corporate Property Associates 12 Incorporated ("CPA(R):12"). Jupiter Food Service, Inc. is a wholly-owned subsidiary of Registrant. Registrant has a management agreement with Carey Property Management Company ("Carey Management"), a division of W.P. Carey. According to the terms of this agreement, Carey Management performs a variety of management services for Registrant. Registrant has entered into an agreement with Fifth Rock L.P., an affiliate, for the purpose of leasing office space. Reference is made to the Prospectus of Registrant dated April 25, 1986 filed pursuant to Rule 424(b), as supplemented by Supplements dated September 2, 1986, December 18, 1986, March 30, 1987, April 27, 1987 and July 14, 1987 under the Securities Act of 1933 and such Prospectus and such Supplements are incorporated herein by reference (said Prospectus, as so supplemented, is hereinafter called the "Prospectus").
Registrant has two industry segments, the investment in and the leasing of industrial and commercial real estate and the operation of a hotel business which was assumed subsequent to a lease termination. As described hereafter, Registrant sold its food service operation in December 1995. By assuming the operation of the hotel business, Management is seeking to preserve the value of the underlying investment while generating a contribution to Registrant's cash flow. See Selected Financial Data in Item 6 and Management's Discussion and Analysis in Item 7 for a summary of Registrant's operations. Also see the material contained in the Prospectus under the heading INVESTMENT OBJECTIVES AND POLICIES.
The properties owned by Registrant are described in Item 2.
Item 3. Legal Proceedings. ------------------
As of the date hereof, Registrant is not a party to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ----------------------------------------------------
No matter was submitted during the fourth quarter of the year ended December 31, 1995 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related ------------------------------------------------- Stockholder Matters. --------------------
Information with respect to Registrant's common equity is hereby incorporated by reference to page 30 of Registrant's Annual Report contained in Appendix A.
Item 6.
Item 6. Selected Financial Data. ------------------------
Selected Financial Data are hereby incorporated by reference to page 1 of Registrant's Annual Report contained in Appendix A.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations. -------------------------- Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 5 of Registrant's Annual Report contained in Appendix A.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data. ---------------------------------------------------------
The following financial statements and supplementary data are hereby incorporated by reference to pages 6 to 23 of Registrant's Annual Report contained in Appendix A:
(i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 1994 and 1995. (iii) Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995. (iv) Consolidated Statements of Partners' Capital for the years ended December 31, 1993, 1994 and 1995. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995. (vi) Notes to Consolidated Financial Statements.
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Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure. -----------------------------------------------------
NONE
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PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant. ---------------------------------------------------
Registrant has no directors or officers. The directors and executive officers of the Corporate General Partner are as follows:
(1) Each officer and director of the Corporate General Partner will hold office until the next annual meeting of the Board of Directors and thereafter until his successor shall have been elected and shall have qualified or until his prior death, resignation or removal.
William Polk Carey and Francis J. Carey are brothers and Raymond S. Clark is their brother-in-law. H. Augustus Carey is the nephew of William Polk Carey and Raymond S. Clark and the son of Francis J. Carey.
A description of the business experience of each officer and director of the Corporate General Partner is set forth below:
William Polk Carey, Chairman and Chief Executive Officer, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey & Co., Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of Hubbard,
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Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance, Mr. Carey is a Governor of the National Association of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University and its medical school, The James A. Baker III Institute for Public Policy at Rice University, and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that university.
Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990 and has served as a member of the Board of Trustees of the Investment Program Association since 1990. From April 1987 until August 1992, he served as counsel to Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships and W.P. Carey and some of its affiliates. A real estate lawyer of more than 30 years' experience, he holds A.B. and J.D. degrees from the University of Pennsylvania.
George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School.
Raymond S. Clark is former President and Chief Executive Officer of the Canton Company of Baltimore and the Canton Railroad Company. A graduate of Harvard College and Yale Law School, he is presently a Director and Chairman of the Executive Committee of W.P. Carey and served as Chairman of the Board of W.P. Carey from its founding in 1973 until 1982. He is past Chairman of the Maryland Industrial Development Financing Authority.
Madelon DeVoe Talley, Vice Chairman, is a member of the New York State Controller's Investment Committee, a Commissioner of the Port Authority of New York and New Jersey, former CIO of New York State Common Retirement Fund and New York State Teachers Retirement System. She also served as a managing director of Rothschild, Inc. and as the President of its asset management division. Besides her duties at W.P. Carey, Mrs. Talley is also a former Governor of the N.A.S.D. and a director of Biocraft Laboratories, a New York Stock Exchange company. She is an alumna of Sarah Lawrence College and the graduate school of International Affairs at Columbia University.
Stephen H. Hamrick is the former Executive Vice President and Managing Director of Wall Street Investor Services where he completed the sale and turnaround of its bank based brokerage business. Previously, he served six years as the Director of Private Investments for PaineWebber Incorporated. From 1975 until joining PaineWebber in 1988, Mr. Hamrick was associated with E.F. Hutton & Company (and the successor firm Shearson Lehman Hutton Inc.), where he held the position of First Vice President and National Director of Private Placements. Mr. Hamrick is a former Chairman of the Securities Industry Association's Direct Investment Committee and the Investment Program Association. He is a Certified Financial Planner and was graduated with degrees in English and Economics from Duke University.
Barclay G. Jones III, Executive Vice President, Managing Director, and co-head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York.
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Lawrence R. Klein, Chairman of the Economic Policy Committee since 1984, is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania, having joined the faculty of Economics and the Wharton School in 1958. He holds earned degrees from the University of California at Berkeley and Massachusetts Institute of Technology and has been awarded the Nobel Prize in Economics as well as over 20 honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to various corporations, governments, and government agencies including the Federal Reserve Board and the President's Council of Economic Advisers.
Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a Certified Public Accountant. Mr. Fernandez received his B.S. degree in Accounting from New York University in 1975 and his M.B.A. in Finance from Columbia University Graduate School of Business in 1981.
Howard J. Altmann, Senior Vice President, Investment Department, joined W.P. Carey in August 1990. He was a securities analyst at Goldman Sachs & Co. for the retail industry from 1986 to 1988. Mr. Altmann received his undergraduate degree in economics and finance from McGill University and his M.B.A. from the Stanford University Graduate School of Business.
H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council.
John J. Park, Senior Vice President and Treasurer, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park received his undergraduate degree from Massachusetts Institute of Technology and his M.B.A. in Finance from New York University.
Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. from Brandeis University and an M.B.A. from Northeastern University.
The officers and directors of W.P. Carey are substantially the same as above.
Item 11.
Item 11. Executive Compensation. -----------------------
Under the Amended Agreement of Limited Partnership of Registrant (the "Agreement"), 5% of Distributable Cash From Operations, as defined, is payable to the Corporate General Partner and 1% of Distributable Cash From Operations is payable to the Individual General Partner. The Corporate General Partner's and the Individual General Partner's share of Distributable Cash From Operations from Registrant during the year ended December 31, 1995 was $178,780 and $104,353, respectively. As owner of 100 Limited Partnership Units, the Corporate General Partner received cash distributions of $22,425 during the year ended December 31, 1995. See Item 6 for the net income allocated to the General Partners under the Agreement. Registrant is not required to pay, and has not paid, any remuneration to the officers or directors of the Corporate General Partner, W.P. Carey or any other affiliate of Registrant during the year ended December 31, 1995.
In the future, the Corporate General Partner will expect to receive 5% of Distributable Cash From Operations, the Individual General Partner will expect to receive 1% of Distributable Cash From Operations and each General Partner will continue to be allocated the same percentage of the profits and losses of Registrant as had been allocated in prior years. For a description of the subordinated interest of the Corporate General Partner and the Individual General Partner in Cash From Sales and Cash From Financings, reference is made to the materials contained in the Prospectus under the heading MANAGEMENT COMPENSATION.
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------- Management. -----------
As of December 31, 1995, no person owned of record or was known by Registrant to own beneficially more than 5% of the Limited Partnership Units.
The following table sets forth as of March 20, 1996 certain information as to the ownership by directors and executive officers of securities of Registrant:
(1) As of March 20, 1996, the Corporate General Partner, Seventh Carey Corporate Property, Inc., owned 100 Limited Partnership Units of Registrant. William Polk Carey, the majority shareholder of the Corporate General Partner, is the beneficial owner of these Units.
There exists no arrangement, known to Registrant, the operation of which may at a subsequent date result in a change of control of Registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions. -----------------------------------------------
For a description of transactions and business relationships between Registrant and its affiliates and their directors and officers, see Notes 2 and 3 to the Consolidated Financial Statements in Item 8. Michael B. Pollack, First Vice President and Secretary of the Corporate General Partner, is a partner of Reed Smith Shaw & McClay which is engaged to perform legal services for Registrant.
No officer or director of the Corporate General Partner, W.P. Carey or any other affiliate of Registrant or any member of the immediate family or associated organization of any such officer or director was indebted to Registrant at any time since the beginning of Registrant's last fiscal year.
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PART IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on ------------------------------------------------------ Form 8-K --------
(a) 1. Consolidated Financial Statements: ----------------------------------
The following consolidated financial statements are filed as a part of this Report:
Report of Independent Accountants.
Consolidated Balance Sheets, December 31, 1994 and 1995.
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995.
Consolidated Statements of Partners' Capital for the years ended December 31, 1993, 1994 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995.
Notes to Consolidated Financial Statements.
The financial statements are hereby incorporated by reference to pages 6 to 23 of Registrant's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedule: -----------------------------
The following schedule is filed as a part of this Report:
Schedule III -Real Estate and Accumulated Depreciation as of December 31, 1995.
Notes to Schedule III.
Schedule III and notes thereto are hereby incorporated by reference to pages 24 to 27 of Registrant's Annual Report contained in Appendix A.
Financial Statement Schedules other than those listed above are omitted because the required information is given in the Consolidated Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist.
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(a) 3. Exhibits: ---------
The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
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(b) Reports on Form 8-K -------------------
During the quarter ended December 31, 1995, Registrant was not required to file any reports on Form 8-K.
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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.
04/01/96 BY: /s/ Claude Fernandez -------------- --------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BY: SEVENTH CAREY CORPORATE PROPERTY, INC.
William P. Carey Chairman of the Board and Director (Principal Executive Officer)
Francis J. Carey President and Director
George E. Stoddard BY: /s/ George E. Stoddard Chairman of the Investment ----------------------- Committee and Director George E. Stoddard Attorney in fact April 1, 1996 Raymond S. Clark Chairman of the Executive Committee and Director
Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director
Madelon DeVoe Talley Vice Chairman of the Board of Directors and Director
04/01/96 BY: /s/ Claude Fernandez - ------------ --------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer)
04/01/96 BY: /s/ Michael D. Roberts - ------------ ----------------------- Date Michael D. Roberts First Vice President and Controller (Principal Accounting Officer)
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APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 7 - A CALIFORNIA LIMITED PARTNERSHIP AND SUBSIDIARIES
1995 ANNUAL REPORT
SELECTED FINANCIAL DATA
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(In thousands except per unit amounts)
(1) 1994 income includes an extraordinary loss of $511,503. 1993 and 1995 net income includes extraordinary gains of $879,000 and $1,324,000 respectively, on the extinguishment of debt. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (3) Includes a special distribution of $150 per Limited Partnership Unit paid in January 1995. (4) Represents scheduled principal amortization paid. (5) Represents mortgage and note obligations due after more than one year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Results of Operations
Net income for the year ended December 31, 1995 decreased by $6,468,000 from the prior year to $5,526,000, largely as the result of a number of nonrecurring items in 1994 which are classified as other income in the accompanying Consolidated Financial Statements, as well as gains and losses from asset sales and the extinguishment of mortgage debt in both years. In addition, the Partnership discontinued operating its food service business segment in December 1995.
The gains on the sale of the Mid-Continent Bottlers, Inc. ("Mid- Continent") properties and of related limited partnership units of a Mid- Continent affiliate contributed $8,497,000 to 1994 net income, representing 71% of 1994 earnings. After adjusting for the effects of gains and losses, nonrecurring items included in other income, discontinued operations and property writedowns, income from continuing operations would have reflected an increase of $317,000 in 1995. The Partnership realized this increase even though its asset base was reduced by using a portion of the proceeds from the Mid- Continent sales to pay a special distribution of $150 per Limited Partnership Unit.
The increase in income in 1995 from continuing operations, as adjusted, was primarily due to decreases in both interest and depreciation expense and improved earnings from the hotel operation. This was partially offset by decreases in lease revenues and other interest income and an increase in general and administrative expense. Of the $1,082,000 decrease in interest expense, $850,000 was due to the prepayment of mortgages in December 1994 on properties which are still subject to leases. The remaining decrease was attributable to the payoff of the Mid-Continent mortgage in connection with the sale of the properties and the decline in interest expense on the Advanced System Applications, Inc. ("ASA") mortgage loan which will fully amortize in March 1996. Lease revenues decreased by $818,000. This decrease was due to the 1994 disposition of the Mid-Continent properties which contributed $1,287,000 of lease revenues in 1994. This was partially offset by an increase of $434,000 in ASA lease revenues pursuant to a lease modification. The ASA lease will terminate in June 1997. The decrease in other interest income occurred because the Partnership held substantially higher cash balances between October 1994, when it sold the Mid-Continent properties, and December 1994, when a portion of that cash was used to retire mortgage debt. General and administrative expenses increased due to an increase in partnership level state franchise tax paid in 1995, due in part to increased income attributable to Illinois from the ASA property.
Earnings for the hotel in Livonia, Michigan increased by 8% or $101,000 as the result of a rise in occupancy rates from 75% to 77% and an 8% increase in the average room rate. The Livonia hotel's earnings reflect a trend of continuing improvement since 1993. The earnings of the hotel operation are affected by economic conditions in the Detroit metropolitan area.
Since November 1988, when a lessee terminated its lease subject to a voluntary bankruptcy petition, the Partnership had operated a restaurant in Jupiter, Florida. On December 20, 1995, the Partnership sold the Jupiter property and the restaurant business for $4,140,000, recognizing gains of $1,019,000 on the sale of the property and $1,324,000 on the forgiveness of a mortgage note collateralized by the property. Although the food service segment had been profitable over the last several years, 1995 sales had declined by approximately 5% due to increasing price competition. Over the past two years, the Partnership had benefited from a restructuring of the limited recourse mortgage debt on the Jupiter property. Under the restructuring, the mortgage loan was bifurcated into two notes. One note (for $2,700,000) required making a principal payment of $600,000 in December 1995 to extend the loan for two years. Pursuant to the restructuring agreement, if this note was paid off entirely, the second note would be forgiven. All payments on this second note, including interest, had been deferred during the initial two years. Management concluded that committing additional cash to pay down or pay the first mortgage note and continue operating the restaurant in an increasingly competitive environment would not yield an adequate return on its investment. Accordingly, Management accepted an offer for the purchase of the property from a third party which wanted to open a new restaurant at the property.
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Net income increased by $11,749,000 and cash provided by operating activities increased by $1,247,000 for 1994 as compared with 1993. The change in net income for 1994 as compared with 1993 was largely the result of $8,497,000 of gains recognized in 1994, $3,303,000 of noncash charges for property writedowns in 1993, including a writedown of $2,900,000 on the Jupiter property, and the effect of extraordinary gains and losses on extinguishment of debt in both 1994 and 1993. In addition to these items, there were a number of other nonrecurring items which affected the comparability of the results of operations in both 1994 and 1993, including the gain on sale of securities and the loss on sale of real estate in 1993, a series of other items in 1994 and 1993 which are reflected on the financial statements as other income and $642,000 of property writedowns during 1994 on properties which were held for sale. Operating income (net income before nonrecurring items, gains and losses and discontinued operations) would have reflected an increase of 19% for 1994 as compared with 1993. The increase in operating income is due to a substantial increase in the profits of the hotel operations, an increase in other interest income and a decrease in property expenses. This increase in income was partially offset by an increase in interest expense. Interest expense increased as a result of the increase in interest rates on a variable rate debt. Interest income increased as a result of interest received on the NVRyan L.P. ("NVRyan") restructuring fees and a note received from Hallwood Group, Inc. as well as from both an increase in cash balances and an increase in interest rates on short-term cash instruments. Property expenses declined in 1994 as 1993 property expenses were affected by costs incurred in resolving various property related issues. Lease revenues were unchanged in 1994 as compared with 1993. The increase from the ASA restructuring was offset by the termination of the Mid-Continent lease after the sale of the properties in October 1994.
The occupancy rate at the Livonia hotel was 75% for 1994 and 1993; while the average room rate increased by approximately 10% in 1994 as compared to 1993. As a result of the ability to achieve a higher room rate, the Partnership's share of hotel operating income increased by 32%. To some extent, the increase reflects an improved economy in the Detroit metropolitan area.
The ASA lease restructuring had a very beneficial effect on the Partnership's income and cash flow in 1995, and it will be even more beneficial in 1996 as a result of the full amortization of the mortgage loan on that property in March 1996. Rental payments will be $1,749,000 before any reductions for any rents on space vacated by ASA. The ASA agreement ends in June 1997 and, although the Partnership has already been successful in remarketing some of the space already vacated by ASA, future cash flow from this property cannot be expected to rise to the level that will be achieved in 1996. Beginning on May 1, 1995, approximately 35% of the leasable space of the ASA property will be leased to the United States Postal Service (the "Postal Service"). The Partnership's share of rents will be $243,000. The Postal Service lease is not a net lease, and the Partnership will be responsible for certain operating costs. ASA will be entitled to one-third of rents, net of landlord costs, through the end of its lease term. Accordingly, the net cash flow which will be provided from the Postal Service lease will vary based on the level of operating costs incurred by the Partnership. Cash flow will not be significantly impacted by the disposition of the food service segment since its contribution to cash flow, net of debt service payments on the property, was only slightly positive. In addition, there are no rent increases scheduled in 1996. Rent increases are scheduled on three leases in 1997 and one lease in 1998. Interest on mortgage loans is expected to decrease as the Partnership's outstanding mortgage balances decreased by more than 30% between 1994 and 1995. The Partnership's $9,607,000 note payable is a variable rate obligation and interest will vary based on the short-term interest rate environment.
Because of the long-term nature of the Partnership's net leases, inflation and changing prices have not unfavorably affected the Partnership's leasing revenues and net income. The Partnership's net leases generally provide for rent increases indexed to increases in the Consumer Price Index ("CPI") and may include caps on such CPI increases or other periodic mandated increases which should increase leasing revenues in the future. Future rent increases may be affected by changes in the method of calculating the CPI. Although there are indications that there may be legislation which considers changes to the CPI methodology, the Partnership cannot predict the outcome of any proposed changes relating the CPI formula. As the rate of inflation has been moderate in recent years, Management believes that hotel operations may not be significantly impacted by changing prices. In addition, Management believes that reasonable increases in costs may be partially or entirely offset by increases in room rates.
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Financial Condition -------------------
Except for the hotel property, substantially all of the Partnership's properties are leased to corporate tenants under long-term net leases which generally require tenants to pay all operating expenses relating to the leased properties. The Partnership depends on cash flow from its net leases to meet operating expenses, service its debt, fund distributions and maintain adequate cash reserves. In addition, the Partnership maintains cash reserves to fund major outlays such as capital improvements and balloon debt payments. Such expenditures may also be funded from additional borrowing on the Partnership's real estate portfolio. The Partnership's cash and cash equivalents at December 31, 1995 of $4,968,000 decreased by $5,558,000 during the year. The decrease in cash was due to payment of a special distribution to partners of $6,860,000 ($150 per Limited Partnership Unit).
In 1995, the Partnership's cash flows provided from operating activities and distributions received from the operating cash flow of an equity investment, together totalled $5,121,000. This amount was sufficient to pay quarterly distributions to partners of $3,575,000 and contribute $1,546,000 toward the payment of scheduled principal payment installments of $1,567,000.
The Partnership's investing activities consisted of selling the Jupiter property and replacing furniture, fixtures and equipment at the hotel in the ordinary course of business and which are necessary for the hotel to remain competitive. A portion of the proceeds received on the sale were used to satisfy the mortgage loan on the property. As a result of successful negotiations with Holiday Inn, the hotel is currently in compliance with the Holiday Inn core modernization plan and will not be required to make any required capital improvements. The Partnership had originally estimated that it would be necessary to make $280,000 in improvements to remain in compliance.
The Partnership's financing activities consist primarily of utilizing the cash flow from operations to pay distributions and meet scheduled principal payment obligations. During 1995, the Partnership used the remaining proceeds of the Mid-Continent sale to make a special distribution of $150 per Limited Partnership Unit representing a return to Limited Partners of 15% of the initial cost of a Unit. Based on current cash flow and cash balances, which remain above the historical levels prior to the Mid-Continent sale, the Partnership expects to continue to increase the rate of distributions paid to its partners. This may be affected by the Partnership's ability to remarket space at the ASA property after the termination of the ASA lease. The Partnership has significant unused borrowing capacity as it paid off a number of mortgage loans over the past several years and has several unleveraged properties subject to long-term leases including properties leased to The Gap, Inc., NYNEX and AutoZone, Inc.
All of the Partnership's mortgage loans either fully amortize or come due over the next three years. A $1,000,000 balloon payment on the limited recourse mortgage loan collateralized by the Winn-Dixie Stores, Inc. is due in September 1996. The Livonia hotel and Swiss M-Tex, L.P. ("M-Tex") mortgage loans have balloon payments which total approximately $6,700,000 and are due in 1997. A balloon payment on the Sybron Acquisition Company ("Sybron") mortgage loan is due in 1998. As these properties, except for the hotel, remain subject to long- term leases and the hotel generates strong operating cash flow, the Partnership believes that its prospects for refinancing the loans are good. In the case of limited recourse mortgage financing which does not fully amortize over its term, the Partnership would be responsible for the balloon payment required, but only to the extent of its interest in the encumbered property since the holder of each such obligation has recourse only to the property collateralizing the debt. The balloon payment could be funded from several alternative sources as determined by management to be in the best interest of the Partnership at the time, such as obtaining new mortgage financing to satisfy the loan, seeking an extension of the loan with the existing lender, evaluating whether a payment could be funded from existing cash reserves, financing unleveraged properties, the sale of a property and use of proceeds from such sale or an increase in Partnership level unsecured debt. The Partnership also has a $9,606,837 loan obligation which matures in 1999 and is recourse to the Partnership's assets. The Partnership is in compliance with the financial covenants of the loan obligation at December 31, 1995.
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Three of the Partnership's lessees have purchase options which are exercisable as follows: 1997 - KSG, Inc. and M-Tex and 1998 - Sybron. The purchase options are all exercisable at the higher of (i) the Partnership's purchase cost for the properties and any prepayment charge that the Partnership would incur in paying off the mortgage loans on the properties or (ii) the fair market value of the properties as encumbered by their leases. In the event that both options are exercised in 1997, the Partnership would expect to receive proceeds, net of the amount necessary to pay off the M-Tex mortgage loan, of no less than $6,138,000. If the properties are sold, annual cash flow would be reduced by approximately $1,056,000.
In connection with the purchase of its properties, the Partnership required sellers of such properties to perform environmental reviews. Management believes, based on the results of such reviews, that the Partnership's properties were in substantial compliance with Federal and state environmental statutes at the time properties were acquired. However, portions of certain properties have been subject to a limited degree of contamination, principally in connection with either leakage from underground storage tanks or surface spills from facility activities. In most instances where contamination has been identified, tenants are actively engaged in the remediation process and addressing identified conditions. Tenants are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. In addition, the Partnership's leases generally require tenants to indemnify the Partnership from all liabilities and losses related to the leased properties. Accordingly, Management believes that the ultimate resolution of environmental matters will not have a material adverse effect on the Partnership's financial condition or liquidity.
Effective January 1, 1995, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of 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. The adoption of SFAS 121 did not have a material effect on the Partnership's financial condition or results of operations.
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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, 1994 and 1995, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1995. We have also audited the financial statement schedule included on pages 24 to 27 of this Form 10-K. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporate Property Associates 7 - a California limited partnership and Subsidiaries as of December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, Schedule of Real Estate and Accumulated Depreciation as of December 31, 1995, 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 22, 1996
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1995
The accompanying notes are an integral part of the consolidated financial statements.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
CONSOLIDATED STATEMENTS of INCOME For the years ended December 31, 1993, 1994 and 1995
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
CONSOLIDATED STATEMENTS of INCOME, Continued For the years ended December 31, 1993, 1994 and 1995
The accompanying notes are an integral part of the consolidated financial statements.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
CONSOLIDATED STATEMENTS of PARTNERS' CAPITAL For the years ended December 31, 1993, 1994 and 1995
(a) Based on weighted average Units issued and outstanding during the periods.
The accompanying notes are an integral part of the consolidated financial statements.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 1993, 1994 and 1995
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 accrued interest thereon.
The accompanying notes are an integral part of the consolidated financial statements.
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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 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.
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.
Long-Lived Assets: - ------------------
Effective January 1, 1995, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Partnership assesses
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
the recoverability of its real estate assets, including residual interests, based on projections of 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. The adoption of SFAS 121 did not have a material effect on the Partnership's financial condition or results of operations.
Real Estate Held for Sale: - --------------------------
Real estate held for sale is accounted for at the lower of cost or net realizable value.
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, 1994 and 1995 were held in the custody of three financial institutions.
Other Assets: - -------------
Included in other assets are deferred rental income, deferred charges, inventory (principally food and beverages for the hotel), organization costs 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. Inventory is stated at the lower of cost or market using the FIFO (first in, first out) method. 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 the amendment of two of the Partnership's leases, one of which was terminated in October 1994, is being amortized on a straight-line basis from the date of the amendments through the end of the initial terms of the leases (20.5 and 23 years) or date of sale, if sooner.
Income Taxes: - -------------
A partnership is not liable for 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 1993 and 1994 amounts have been reclassified to conform to the 1995 presentation.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
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. The General Partners may be entitled to certain incentive fees during the liquidation stage of the Partnership. A division of W.P. Carey & Co., Inc. ("W.P. Carey"), is engaged in the real estate brokerage business and the Partnership may sell properties through the division and pay subordinated real estate commissions as provided in the Agreement. The division could ultimately earn up to approximately $724,000 of real estate commissions due to the sales of properties between 1990 and 1995, which amount will be retained by the Partnership unless subordination provisions of the Agreement are satisfied.
In accordance with the Agreement, the General Partners were allocated a portion of the 1993 and 1994 gains on sale in order to eliminate their negative balances as well as a portion of the related tax gains. This did not affect the allocation of cash distributions to Partners. The Partnership paid a special distribution of $6,859,597 in 1995 related to the sales 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: ----------------------------------
Under the Agreement, 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:
During 1993, 1994 and 1995, fees aggregating $75,799, $23,426 and $67,230 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 1993, 1994 and 1995 were $39,995 $51,874, and $90,569,
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
respectively. The increase in 1995 is 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.
4. Real Estate Leased to Others Accounted for Under the Operating Method --------------------------------------------------------------------- and Operating Real Estate: --------------------------
A. Real Estate Leased to Others: -----------------------------
The scheduled minimum future rentals, exclusive of renewals, under noncancellable operating leases amount to approximately $4,218,000 in 1996, $3,286,000 in 1997, $2,410,000 in 1998, $2,412,000 in 1999, $2,315,000 in 2000 and aggregate approximately $23,421,000 through 2013. Contingent rentals were approximately $129,000, $139,000 and $138,000 in 1993, 1994 and 1995, respectively.
B. Operating Real Estate: ---------------------- Operating real estate, at cost, is summarized as follows:
5. Net Investment in Direct Financing Leases: ------------------------------------------
Net investment in direct financing leases is summarized as follows:
The scheduled minimum future rentals, exclusive of renewals, under noncancellable direct financing leases amount to approximately $1,888,000 in 1996, $1,885,000 in each of the years 1997 to 2000 and aggregate approximately $31,518,000 through 2014.
Contingent rentals were approximately $394,000, $490,000 and $322,000 in 1993, 1994 and 1995, respectively.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Future minimum ground lease commitments for certain properties occupied by AutoZone, Inc. aggregate $946,000 through 2005.
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 $29,785,000, before accumulated depreciation and the assignment of various leases. As of December 31, 1995, mortgage notes payable bear interest at rates varying from 9.22% to 11.25% per annum and mature from 1996 to 1998. Scheduled principal payments during each of the next three years following December 31, 1995 are as follows:
Year Ending December 31, ------------------------ 1996 $ 1,706,980 1997 6,753,569 1998 3,468,202 ----------- Total $11,928,751 ===========
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 (9.97% at December 31, 1995). 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 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 terms of the agreement. The Partnership is in compliance with such terms at December 31, 1995.
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 declined to accept all mandatory offers of proceeds by the Partnership to date.
Interest paid was $4,010,425, $3,426,650 and $2,467,322 in 1993, 1994 and 1995, respectively.
Continued
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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:
Distributions of $51,827 to the General Partners and $811,954 to the Limited Partners for the quarter ended December 31, 1995 were declared and paid in January 1996.
8. Income for Federal Tax Purposes: --------------------------------
Income for financial statement purposes differs from income for Federal income tax purposes, because of the difference in the treatment of certain items for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows:
Continued
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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 1993, 1994 and 1995, the Partnership earned its total commercial and industrial leasing revenues (rental income plus interest income from financing leases) from the following lease obligors:
(1) Rental income is net of ground lease rental expense of $93,000, $97,000 and $101,000 in 1993, 1994 and 1995, respectively (see Note 5).
The summarized results of the Partnership's share of the hotel operations are as follows:
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
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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.
During 1993, Management determined that the net realizable value of its investment in the Jupiter property was impaired. As a result, the Partnership recorded a writedown to estimated net realizable value of $2,900,000 in 1993.
In connection with 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 1993, 1994 and 1995 have been reclassified in the accompanying Consolidated Financial Statements as discontinued operations and are as follows:
11. Hotel Property in Livonia, Michigan: ------------------------------------
On November 20, 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 September 1993, the mortgage loan on the property of approximately $12,000,000 (of which the Partnership's share was approximately $7,862,064) was restructured. In consideration for a mortgage principal payment of $4,000,000, the annual interest rate on the mortgage loan was reduced from a fixed rate of 10.9% to LIBOR plus 3.5% retroactive to June 1992 and the lender agreed not to accelerate the loan. CPA(R):6 advanced the Partnership's share of the mortgage prepayment which was repaid in November 1993. In connection with providing the advance, CPA(R):6 received $90,000 from the Partnership based on a formula pursuant to a fairness opinion provided by an independent investment banking firm.
Continued
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
On March 8, 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 446,345 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 $9 or greater, the Partnership and CPA(R):6 may, subject to certain restrictions, receive a payment from the Hallwood Group representing the 25% appreciation of the pledged units prior to the note maturity date. At December 31, 1995, the pledged limited partner units had a market value of $16.50 per unit.
The Partnership's share of the cash proceeds and the note receivable of $425,862 are included in other income in 1994.
12. Gains and Losses on Sale: -------------------------
A. In October 1994, the Partnership sold its properties leased to Mid- Continent Bottlers, Inc.'s ("Mid-Continent") to the lessee for $17,800,000 and sold the Partnership's 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 $6,791,000 ($150 per Limited Partnership Unit) and $68,597 to a general partner.
The Partnership purchased the Mid-Continent properties in December 1986 for $9,984,200. Upon sale of the properties, $321,000 of deferred rental income was recognized and included in other income in 1994.
B. In August 1993, the Partnership sold excess land on property in Travelers Rest, South Carolina leased to Swiss M-Tex, L.P. ("M Tex"). The Partnership realized a gain of $156,486 from the sale and used the net proceeds of $166,600 to prepay a portion of the mortgage note collateralized by the property.
Continued
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
In December 1993, the Partnership sold a property in Phoenix, Arizona to its lessee, Overnite Transportation Company ("Overnite"), and incurred a loss on the sale of $708,869. The Overnite lease included an option to purchase the property for $925,000.
In connection with the transfer of Mid-Continent's interest in the Hazelwood, Missouri property to Tandem Holdings, Inc. ("Tandem") in 1986, the Partnership received warrants to purchase shares of Tandem's common stock. In February 1993, in connection with the merger of Tandem with another company, the Partnership sold the warrants and realized a gain of $283,740.
13. Properties Formerly Leased to NVRyan, L.P.: -------------------------------------------
Pursuant to a restructuring agreement with NVRyan L.P. ("NVRyan") in September 1993, which was reached in connection with the confirmation by the Bankruptcy Court of NVRyan's reorganization plan, NVRyan was permitted to sever four properties from its lease in exchange for restructuring fees of $2,600,000 (of which the Partnership's share was $962,962). For financial reporting purposes, the fees were deferred and are being amortized over the remaining term of the NVRyan lease. In connection with the sale of the two properties in 1994, $490,101 of such deferred fees were recognized and included in other income.
In August 1994, the Partnership and 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 of $403,328 was recognized on the Plant City property in 1993.
In June 1994, the Partnership and Corporate Property Associates 8, L.P. ("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.
14. Equity Investment: ------------------
The Partnership and CPA(R):8 own 50% interests in a limited partnership which in September 1993 purchased a leasehold interest in a hotel property in Topeka, Kansas subleased to Hotel Corporation of America. Summarized financial information of the limited partnership is as follows:
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Extraordinary Gains and Losses on Extinguishment of Debt: ---------------------------------------------------------
A. 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 $1,323,808.
B. In December 1994, the Partnership paid off $1,886,148 of the mortgage loan on the AutoZone, Inc. ("AutoZone") and NYNEX 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 premium 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 premium of $375,243, resulting in an extraordinary charge on the extinguishment of debt.
C. In November 1993, the Partnership obtained financing of $9,606,837 and used a portion of the proceeds to pay off the mortgage loans collateralized by the properties formerly leased to Yellow Front Stores, Inc. ("Yellow Front"). The Yellow Front loan, which had a principal balance of $4,725,516 was satisfied with a payment of $3,800,000, resulting in an extraordinary gain of $879,433 in 1993 on the extinguishment of debt, net of related costs incurred.
16. 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 entered into a lease modification agreement with ASA which allows ASA to terminate its lease in June 1997 instead of June 2003. Under the modification agreement, annual rent increased to $5,200,000 (of which the Partnership's share is $1,749,280) from $1,850,000 (of which the Partnership's share was $622,340). In consenting to the modification, 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. To the extent that the Partnership and CPA(R):7 enter into new leases for any vacated space, ASA is entitled to one-third of all rentals received, net of any landlord costs, during the remaining term of its lease.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
On January 31, 1996, the Partnership and CPA(R):8 entered into a lease with the United States Postal Service (the "Postal Service"). The lease has a 10-year term commencing May 1, 1996 with annual rentals of $722,800 (of which the Partnership's share will be $243,150), increasing to $822,800 after five years. The Partnership and CPA(R):8 retain the obligation to provide maintenance and support services to the lessee. The lease 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.
The Partnership and CPA(R):8 will provide the Postal Service a tenant improvement allowance of up to $600,000 (of which the Partnership's share is $201,840).
17. Subsequent Events: ------------------
On February 12, 1996, the Partnership sold a property located in Denham Springs, Louisiana and leased to AutoZone, Inc. ("AutoZone") for $431,779, net of costs. AutoZone's lease allows it to purchase back those leased retail stores it judges to be uneconomical and the Denham Springs property was so deemed. On February 14, 1996, the Partnership sold its property in Monte Vista, Colorado for $186,090, net of costs. No gain or loss will be reported in 1996, as the Monte Vista property was written down by $319,685 at December 31, 1995 to an amount equal to the net sales proceeds received by the Partnership.
The two properties have been reclassified as real estate held for sale in the accompanying consolidated financial statements. Solely as a result of the sales, annual cash flow will decrease by approximately $61,000.
18. 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 approximates the carrying amount of such mortgage notes at December 31, 1995. 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 London Inter-Bank Offered Rate. Accordingly, the carrying amount of the note payable approximates fair value as of December 31, 1995.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES SCHEDULE of REAL ESTATE AND ACCUMULATED DEPRECIATION as of December 31, 1995
See accompanying notes to Schedule.
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES SCHEDULE of REAL ESTATE AND ACCUMULATED DEPRECIATION as of December 31, 1995
See accompanying notes to Schedule.
CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES TO SCHEDULE of REAL ESTATE AND ACCUMULATED DEPRECIATION
(a) Consists of acquisition costs including legal fees, appraisal fees, title costs as well as other related professional fees and capital improvements at various properties.
(b) At December 31, 1995, the aggregate cost of real estate owned for Federal income tax purposes is $61,148,788.
(c) The decrease in net investment is due to the writedowns and sales of properties.
(d)
(Continued)
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CORPORATE PROPERTY ASSOCIATES 7 - a California limited partnership and SUBSIDIARIES NOTES TO SCHEDULE of REAL ESTATE AND ACCUMULATED DEPRECIATION - Continued
(e)
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PROPERTIES
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(1) These properties are encumbered by mortgage notes payable. (2) These properties are operated by Registrant. (3) Ownership of building with ground lease of land. (4) This property is vacant.
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MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS - --------------------------------------------------------------------------------
Except for limited or sporadic transactions, there is no established public trading market for the Limited Partnership Units of the Partnership.
As of December 31, 1995, there were 2,269 holders of record of the Limited Partnership Units of the Partnership.
In accordance with the requirements of the Partnership's Amended Agreement of Limited Partnership (the "Agreement") contained as Exhibit A to the Prospectus, the Corporate General Partner expects to continue to make quarterly distributions of Distributable Cash From Operations, as defined, in the Agreement. The following table shows the frequency and amount of distributions paid per Unit since 1992:
(a) Includes a special distribution of $150 per Limited Partnership Unit.
REPORT ON FORM 10-K - --------------------------------------------------------------------------------
The Corporate General Partner will supply to any owner of Limited Partnership Units, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 1995 as filed with the Securities and Exchange Commission.
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DIRECTORS AND SENIOR OFFICERS
The Partnership has no directors or officers. The directors and senior officers of the Corporate General Partner are as follows:
William Polk Carey Chairman of the Board Director
Francis J. Carey President Director
George E. Stoddard Chairman of the Investment Committee Director
Raymond S. Clark Chairman of the Executive Committee Director
Madelon DeVoe Talley Vice Chairman of the Board Director
Stephen H. Hamrick Director
Barclay G. Jones III Executive Vice President Director
Lawrence R. Klein Chairman of the Economic Policy Committee Director
Claude Fernandez Executive Vice President Chief Administrative Officer
Howard J. Altmann Senior Vice President
H. Augustus Carey Senior Vice President
John J. Park Senior Vice President Treasurer
Debra E. Bigler First Vice President
Ted G. Lagried First Vice President
Anthony S. Mohl First Vice President
Michael D. Roberts First Vice President Controller
The directors and senior officers of W. P. Carey & Co., Inc. are substantially the same as above.
A description of the business experience of each director of the Corporate General Partner is set forth below:
William Polk Carey, Chairman and Chief Executive Officer, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey & Co., Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance, Mr. Carey is a Governor of the National Association
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of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University and its medical school, The James A. Baker III Institute for Public Policy at Rice University, and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that university.
Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990 and has served as a member of the Board of Trustees of the Investment Program Association since 1990. From April 1987 until August 1992, he served as counsel to Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships and W.P. Carey and some of its affiliates. A real estate lawyer of more than 30 years' experience, he holds A.B. and J.D. degrees from the University of Pennsylvania.
George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School.
Raymond S. Clark is former President and Chief Executive Officer of the Canton Company of Baltimore and the Canton Railroad Company. A graduate of Harvard College and Yale Law School, he is presently a Director and Chairman of the Executive Committee of W.P. Carey and served as Chairman of the Board of W.P. Carey from its founding in 1973 until 1982. He is past Chairman of the Maryland Industrial Development Financing Authority.
Madelon DeVoe Talley, Vice Chairman, is a member of the New York State Controller's Investment Committee, a Commissioner of the Port Authority of New York and New Jersey, former CIO of New York State Common Retirement Fund and New York State Teachers Retirement System. She also served as a managing director of Rothschild, Inc. and as the President of its asset management division. Besides her duties at W.P. Carey, Mrs. Talley is also a former Governor of the N.A.S.D. and is a director of Biocraft Laboratories, a New York Stock Exchange company. She is an alumna of Sarah Lawrence College and the graduate school of International Affairs at Columbia University.
Stephen H. Hamrick is the former Executive Vice President and Managing Director of Wall Street Investor Services where he completed the sale and turnaround of its bank based brokerage business. Previously, he served six years as the Director of Private Investments for PaineWebber Incorporated. From 1975 until joining PaineWebber in 1988, Mr. Hamrick was associated with E.F. Hutton & Company (and the successor firm Shearson Lehman Hutton Inc.), where he held the position of First Vice President and National Director of Private Placements. Mr. Hamrick is a former Chairman of the Securities Industry Association's Direct Investment Committee and the Investment Program Association. He is a Certified Financial Planner and was graduated with degrees in English and Economics from Duke University.
Barclay G. Jones III, Executive Vice President, Managing Director, and co-head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York.
Lawrence R. Klein, Chairman of the Economic Policy Committee since 1984, is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania, having joined the faculty of Economics and the Wharton School in 1958. He holds earned degrees from the University of California at Berkeley and Massachusetts Institute of Technology and has been awarded the Nobel Prize in Economics as
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well as over 20 honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to various corporations, governments, and government agencies including the Federal Reserve Board and the President's Council of Economic Advisers.
Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a Certified Public Accountant. Mr. Fernandez received his B.S. degree in Accounting from New York University in 1975 and his M.B.A. in Finance from Columbia University Graduate School of Business in 1981.
Howard J. Altmann, Senior Vice President, Investment Department, joined W.P. Carey in August 1990. He was a securities analyst at Goldman Sachs & Co. for the retail industry from 1986 to 1988. Mr. Altmann received his undergraduate degree in economics and finance from McGill University and his M.B.A. from the Stanford University Graduate School of Business.
H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council.
John J. Park, Senior Vice President and Treasurer, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park received his undergraduate degree from Massachusetts Institute of Technology and his M.B.A. in Finance from New York University.
Debra E. Bigler, First Vice President, joined W.P. Carey in 1989 as an assistant marketing director, rising to her present position where she bears responsibility for investor services throughout the southern United States. She was previously employed by E. F. Hutton & Company for nine years where she began as a Marketing Associate in Private Placement, Sales and Marketing and was then promoted to Regional Director.
Ted G. Lagreid, First Vice President, joined W.P. Carey in 1994 and is regional director responsible for investor services in the western United States. Prior to joining the firm, he was a Vice President with Shurgard Capital Group, then for Sun America where he was an executive in its mutual funds group. He earned an A.B. from the University of Washington, received an M.P.A. from the University of Puget Sound and then spent eight years in the city of Seattle's Office of Management and Budget and Department of Community Development. Mr. Lagreid was a commissioner of the City of Oakland, California, serving on its Community and Economic Advisory Commission.
Anthony S. Mohl, First Vice President, Director of Portfolio Management, joined W.P. Carey as Assistant to the President after receiving his M.B.A. from the Columbia University Graduate School of Business. Mr. Mohl was employed as an analyst in the strategic planning group at Kurt Salmon Associates after receiving an undergraduate degree from Wesleyan University.
Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. from Brandeis University and an M.B.A. from Northeastern University.
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