1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-15778
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CORPORATE PROPERTY ASSOCIATES 7, A CALIFORNIA LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
CALIFORNIA 13-3327950
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
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(Address of principal executive offices) (Zip Code)
(212) 492-1100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
INDEX
Page No.
PART I
Item 1. - Financial Information*
Consolidated Balance Sheets, December 31, 1996
and September 30, 1997 2
Consolidated Statements of Income for the three and nine
months ended September 30, 1996 and 1997 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1997 4
Notes to Consolidated Financial Statements 5-7
Item 2. - Management's Discussion of Operations 8-9
PART II
Item 6. - Exhibits and Reports on Form 8-K 10
Signatures 11
*The summarized financial information contained herein is unaudited; however in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
PART I
Item 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1996 1997
----------- -----------
(Note) (Unaudited)
ASSETS:
Land, buildings and personal property,
net of accumulated depreciation of
$11,101,853 at December 31, 1996 and
$11,849,702 at September 30, 1997 $33,276,821 $32,138,583
Net investment in direct financing leases 15,542,368 10,844,344
Cash and cash equivalents 5,591,985 6,233,152
Real estate held for sale 4,898,024
Other assets 1,020,950 1,139,970
----------- -----------
Total assets $55,432,124 $55,254,073
=========== ===========
LIABILITIES:
Mortgage notes payable $10,314,828 $10,046,160
Note payable 9,606,837 9,606,837
Accrued interest payable 324,737 354,380
Accounts payable and accrued expenses 676,737 620,591
Accounts payable to affiliates 113,485 56,029
Prepaid and deferred rental income 371,116 418,544
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Total liabilities 21,407,740 21,102,541
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PARTNERS' CAPITAL:
General Partners 161,740 169,369
Limited Partners (45,209 Limited
Partnership Units issued and outstanding) 33,862,644 33,982,163
----------- -----------
Total partners' capital 34,024,384 34,151,532
----------- -----------
Total liabilities and
partners' capital $55,432,124 $55,254,073
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Note: The balance sheet at December 31, 1996 has been derived from the
audited consolidated financial statements at that date.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1997 September 30, 1996 September 30, 1997
------------------ ------------------ ------------------ ------------------
Revenues:
Rental income from
operating leases $ 1,107,939 $ 760,452 $ 3,236,705 $ 2,986,155
Interest from direct
financing leases 594,629 631,311 1,706,245 1,814,467
Other interest income 72,102 72,195 203,242 212,035
Other income 143,866 143,866 241,272
Revenue of hotel operations 1,425,136 1,448,688 4,217,754 4,336,803
----------- ----------- ----------- -----------
3,343,672 2,912,646 9,507,812 9,590,732
----------- ----------- ----------- -----------
Expenses:
Interest 488,360 470,308 1,473,906 1,381,387
Operating expenses of
hotel operations 1,033,585 1,006,428 3,073,909 3,055,103
Depreciation 287,866 311,470 861,783 901,226
General and administrative 94,058 62,996 314,147 435,455
Property expenses 88,018 483,600 307,822 768,390
Amortization 20,516 14,718 52,512 44,156
Writedown to net realizable
value 139,999 139,999
----------- ----------- ----------- -----------
2,012,403 2,489,519 6,084,079 6,725,716
----------- ----------- ----------- -----------
Income before loss from
equity investments and
gain on sales of real estate 1,331,269 423,127 3,423,733 2,865,016
Loss from equity investments (31,141) (35,433) (96,924) (97,470)
----------- ----------- ----------- -----------
Income before gain on
sales of real estate 1,300,128 387,694 3,326,809 2,767,546
Gain on sales of real estate 74,729
----------- ----------- ----------- -----------
Net income $ 1,300,128 $ 387,694 $ 3,401,538 $ 2,767,546
=========== =========== =========== ===========
Net income allocated
to General Partners $ 78,008 $ 23,262 $ 200,356 $ 166,053
=========== =========== =========== ===========
Net income allocated
to Limited Partners $ 1,222,120 $ 364,432 $ 3,201,182 $ 2,601,493
=========== =========== =========== ===========
Net income per Unit:
(45,209 Limited
Partnership Units) $ 27.03 $ 8.06 $ 70.81 $ 57.54
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
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1996 1997
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Cash flows from operating activities:
Net income $ 3,401,538 $ 2,767,546
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 914,295 945,382
Other noncash items 111,850 40,322
Loss from equity investments 96,924 97,470
Writedown to net realizable value 139,999
Gain on sales of real estate (74,729)
Net change in operating assets and liabilities (368,796) (350,167)
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Net cash provided by operating activities 4,081,082 3,640,552
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Cash flows from investing activities:
Additional capitalized costs (356,038) (102,987)
Distributions from equity investments 21,986 12,668
Net proceeds from sales of real estate 617,867
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Net cash by provided by (used in) investing activities 283,815 (90,319)
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Cash flows from financing activities:
Distributions to partners (2,606,248) (2,640,398)
Payments on mortgage principal (530,166) (268,668)
Prepayment of mortgage note payable (1,000,000)
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Net cash used in financing activities (4,136,414) (2,909,066)
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Net increase in cash and cash equivalents 228,483 641,167
Cash and cash equivalents, beginning of period 4,968,410 5,591,985
----------- -----------
Cash and cash equivalents, end of period $ 5,196,893 $ 6,233,152
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 1,493,208 $ 1,351,744
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and footnotes there to
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1996.
Note 2. Distributions to Partners:
Distributions declared and paid to partners during the nine months ended
September 30, 1997 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
December 31, 1996 $ 52,750 $826,421 $ 18.28
======== ======== ========
March 31, 1997 $ 52,808 $827,324 $ 18.30
======== ======== ========
June 30, 1997 $ 52,866 $828,229 $ 18.32
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A distribution of $18.34 per Limited Partner Unit for the quarter ended
September 30, 1997 was declared and paid in October 1997.
Note 3. Transactions with Related Parties:
For the three-month and nine-month periods ended September 30, 1996, the
Partnership incurred property management fees of $22,854 and $72,148,
respectively, and general and administrative expense reimbursements of $20,973
and $88,916, respectively. For the three-month and nine-month periods ended
September 30, 1997, the Partnership incurred property management fees of $6,397
and $64,241, respectively, and general and administrative expense reimbursements
of $50,650 and $138,253, respectively. Management believes that ultimate payment
of a preferred return to the General Partners of $805,015, based upon cumulative
proceeds of sales of assets, is reasonably possible but not probable, as defined
in Statement of Financial Accounting Standards No. 5, and no accrual for such
preferred return has been reflected in the accompanying Consolidated Financial
Statements.
The Partnership, in conjunction with certain affiliates, is a participant in a
cost sharing agreement for the purpose of renting and occupying office space.
Under the agreement, the Partnership pays its proportionate share of rent and
other costs of occupancy. Net expenses incurred for the nine months ended
September 30, 1996 and 1997 were $61,918 and $42,952, respectively.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 4. 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 hotel business. For
the nine-month periods ended September 30, 1996 and 1997, the Partnership earned
its lease revenues (rental income plus interest income from financing leases)
from the following lease obligors:
1996 % 1997 %
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KSG, Inc. $ 615,817 12% $ 769,765 16%
Advanced System Applications, Inc. 1,162,425 24 762,221 16
The Gap, Inc. 695,676 14 695,676 15
Sybron Acquisition Company 614,372 12 614,372 13
Swiss M-Tex, L.P. 396,384 8 390,876 8
AutoZone, Inc. 342,791 7 295,199 6
Other 245,830 6 292,942 6
CSK Auto Parts, Inc. 291,623 6 291,623 6
NVRyan L.P. 218,667 4 218,667 5
United States Postal Service 101,313 2 211,229 4
Bell Atlantic Corporation (formerly
NYNEX Corporation) 161,700 3 161,700 3
Winn-Dixie Stores, Inc. 96,352 2 96,352 2
---------- ---------- ---------- ----------
$4,942,950 100% $4,800,622 100%
========== ========== ========== ==========
Results for the Partnership's hotel operations of a Holiday Inn in Livonia,
Michigan for the nine-month periods ended September 30, 1996 and 1997 are
summarized as follows:
1996 1997
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Revenues $ 4,217,754 $ 4,336,803
Fees paid to hotel management company (107,367) (127,117)
Other operating expenses (2,966,542) (2,927,986)
----------- -----------
Hotel operating income $ 1,143,845 $ 1,281,700
=========== ===========
Note 5. Property Leased to KSG, Inc.:
In December 1996, KSG, Inc. ("KSG") notified the Partnership that it was
exercising an option to purchase its leased property in Hazelwood, Missouri from
the Partnership. The exercise price is the greater of $4,698,024 (the
Partnership's purchase price for the property in March 1987) or fair market
value as encumbered by the lease. The option provides that the sale of the
property occur no later than March 8, 1998.
A scheduled rent increase went into effect on April 1, 1997; however, KSG is
disputing the methodology used to calculate such rent increase. As a result of
this dispute, $105,590 of rents are in arrears. Management believes that this
rent arrearage will be collected and has taken legal action to settle the
dispute regarding the calculation of the rent increase. For the purposes of
determining the option price of the KSG property, fair market value as
encumbered by the lease is determined, in part, by estimating future rents for
the remaining lease terms including the renewal terms. Accordingly,
determination of the exercise price is contingent on resolving the dispute. The
carrying value of the KSG property of $4,698,024 has been classified as real
estate held for sale at September 30, 1997.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 6. Properties Leased to Swiss M-Tex, L.P.:
The Partnership owns properties in Travelers Rest and Liberty, South Carolina
leased to Swiss M-Tex, L.P. ("M-Tex"). As a result of M-Tex's financial
difficulties, the Partnership has agreed to enter into a restructuring agreement
with M-Tex, as described below. Completion of the agreement is subject to the
consent of the M-Tex mortgage lender and a creditor of M-Tex.
Pursuant to the restructuring agreement, M-Tex will be released from its lease
obligations on the Liberty property. Beginning October 1, 1997, annual rent for
the Travelers Rest property will be $480,000 increasing to $528,000 after five
years. Prior to the amendment, M-Tex annual rent was approximately $553,000.
Unpaid rents of $176,226 will be forgiven and have been written off.
The Partnership will lend $150,000 to M-Tex. The loan will bear interest at an
annual interest rate of 15% and mature no later than October 1, 2000. If the
loan has not been repaid by the maturity date, the Partnership will have the
option to convert the loan into warrants convertible to a limited partnership
interest in M-Tex at an exercise price of $150,000. The percentage ownership
under the warrants would be equal to the ratio of $150,000 divided by the sum of
$150,000 and M-Tex's partners' capital balance at the time of exercise. The
Partnership will also receive warrants convertible to a 37.86% limited
partnership interest in M-Tex. The warrants have an exercise price of $850,000,
and can only be exercised under certain circumstances. If M-Tex achieves certain
operating results, the Partnership will have a put option to sell the warrants
back to M-Tex at fair market value. At the end of the lease term, October 1,
2007, M-Tex will have the option to purchase the Travelers Rest property at fair
market value.
The Partnership has entered into an agreement to sell the Liberty property for
$200,000, subject to the purchaser's ability to obtain financing. In connection
with the offer, the Partnership has written down the Liberty property to an
estimated net realizable value of $200,000 and incurred a charge of $139,999 on
the writedown. The Liberty property has been classified as real estate held for
sale at September 30, 1997.
Note 7. Consent Solicitation:
On October 15, 1997, Carey Diversified LLC ("CD(SM)") filed a Consent
Solicitation Statement/Prospectus ("consent solicitation") with the United
States Securities and Exchange Commission. The General Partners are proposing
that the Limited Partners of the nine CPA(R) limited partnerships approve a
transaction in which each CPA(R) limited partnership would be merged with a
subsidiary partnership of CD(SM), of which CD(SM) is the general partner. As
described in the consent solicitation, each limited partner would have the
option of either exchanging his or her limited partnership units for an interest
in CD(SM) ("Listed Shares") or to retain a limited partnership interest in the
subsidiary partnership ("Subsidiary Partnership Units"). If the holders of a
majority of the outstanding limited partnership units of the Partnership consent
to the transaction, the merger of the Partnership with the corresponding
subsidiary partnership of CD(SM) may be consummated. If the transaction is
consummated, the General Partners will exchange a portion of their general
partnership interests in exchange for Listed Shares. The transaction will not
occur unless the CPA(R) Partnerships approving the transaction represent at
least $200,000,000 in Total Exchange Value, as defined. There is no assurance
that the holders of limited partnership units of the Partnership will consent to
the transaction or that the transaction will occur.
If the transaction is completed, the Listed Shares will be listed and publicly
traded on the New York Stock Exchange. Subsidiary Partnership Units will provide
substantially the same economic interest and legal rights as those of a limited
partnership unit in the Partnership, but will not be listed on a securities
exchange. Conversion of limited partnership units to Listed Shares or Subsidiary
Partnership Units will not result in a taxable event to the limited partners.
The risk factors and benefits relating to the proposed transaction are described
in the consent solicitation. The General Partners, as well as all the Directors
of the Corporate General Partners of the CPA(R) Partnerships, have unanimously
approved the proposed transaction.
9
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
Results of Operations
Net income for the three-month and nine-month periods ended September
30, 1997 decreased by $912,000 and $634,000, respectively, as compared with the
similar periods ended September 30, 1996. Excluding nonrecurring other income
items and gains, a noncash charges for the writedown of a property and writeoff
of uncollected rents, the decrease in income would have been $452,000 and
$341,000 for the comparable three-month and nine-month periods, respectively.
The decreases in income, as adjusted, were primarily due to a decrease in lease
revenues, an increase in property expenses, and, for the nine-month period, an
increase in general and administrative expenses. The effect of these items were
partially offset by an increase in hotel operating income.
The decrease in lease revenues is attributable to the June 30, 1997
expiration of the Partnership's lease with Advanced System Applications, Inc. at
the Partnership's property in Bloomingdale, Illinois. In 1994, the Partnership
and Advanced System Applications agreed to a termination of the lease in 1997
rather than 2003 in consideration for an increase in annual rents of $1,160,000.
Accordingly, the rents earned over the final three lease years were
substantially in excess of market rents. To obtain the consent from the mortgage
lender for the 1994 lease modification, the Partnership agreed to accelerate the
mortgage payments in order to amortize fully the Bloomingdale property mortgage
loan before the end of the lease term. As a result, the mortgage loan was paid
in March 1996. Had the Partnership not entered into these agreements, the
Partnership would have needed to refinance a scheduled balloon payment of
$2,303,000 in 1995. In July 1997, the United States Postal Service increased its
occupancy of the Bloomingdale property from 34% to 52% of the leasable space.
Annual rentals from the Postal Service lease have increased to $363,000, with
the Partnership retaining the obligation to pay property costs. The Partnership
is actively remarketing the remaining leasable space. Prior to the modification
agreements, the Partnership's annual cash flow from the Bloomingdale property
was approximately $355,000. If the Partnership is successful in leasing the
unoccupied space, future annual cash flow after operating costs could
potentially reach or exceed the cash flows achieved prior to the modification
agreement.
In addition to the increased rent from the Postal Service, there was a
rent increase on the Partnership's lease with KSG. KSG is disputing the
calculation of its rent increase; however, KSG has exercised its purchase option
so that the KSG rent increase will not have a significant long-term effect on
future operating cash flow. The increase in property expenses was due to the
Partnership's obligation, since May 1996, to pay the operating costs of the
Bloomingdale property, a writeoff of uncollected rents from Swiss M-Tex, L.P. of
$176,000 in the current quarter and a litigation settlement relating to the
hotel property of $78,000. The increase in general and administrative expense
was due to necessary administrative reimbursements incurred in structuring the
proposed transaction described in Note 7 to the Consolidated Financial
Statements. The increase in hotel earnings was due to a 10% increase in the
average room rate at the Livonia hotel. The occupancy rate was unchanged and
operating expenses were stable. Hotel earnings continue to benefit from the
current economic conditions in the Detroit metropolitan area. Interest expense
also declined as a result of paying off a mortgage loan on the Winn-Dixie
Stores, Inc. property in 1996.
The Partnership is negotiating a restructuring agreement with M-Tex
which would decrease annual rent from approximately $553,000 to $480,000. Annual
cash flow (rent less mortgage debt service); however, is expected to increase as
it is anticipated that the mortgage loan on the M-Tex properties will be paid
off.
10
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
Financial Condition:
There has been no material change in the Partnership's financial
condition since December 31, 1996. Cash provided from operating activities of
$3,641,000 was sufficient to pay quarterly distributions to partners of
$2,640,000 and scheduled mortgage principal installments of $269,000. The
General Partners expect that the Partnership will remain in compliance with the
covenants of its unsecured note payable, including those provisions relating to
cash flow ratios, even though cash flow has decreased subsequent to the
expiration of the Advanced System Applications lease.
The mortgage loan on the M-Tex properties of $1,714,000 matured in
September 1997. The Partnership expects to pay off the loan before the end of
the year in connection with executing the proposed restructuring of the M-Tex
lease. The M-Tex loan can be paid off using existing cash reserves, if
necessary. The Partnership is seeking to extend the maturity of the mortgage
loan on the Livonia hotel property, which is due in November 1997. The loan has
an outstanding balance of $4,958,000, and the General Partners believe that the
prospects for refinancing the loan are favorable.
Sybron Acquisition Company has a purchase option which can be exercised
in 1998. The option provides a purchase price for the Sybron properties at the
greater of fair market value or the Partnership's purchase price for the
properties. If the option is exercised, the Partnership would receive proceeds,
after paying off the Sybron mortgage loan, of no less than $2,797,000. Annual
cash flow from the Sybron properties is $352,000. The Partnership has not
received any indication from Sybron whether it intends to exercise its option.
If the option is not exercised the initial lease term will expire in 2013. KSG,
Inc. has exercised its option to purchase its leased property by no later than
March 8, 1998. As more fully described in Note 5 to the Consolidated Financial
Statements, KSG is disputing the methodology used in calculating its 1997 rent
increase. As the fair market value option price is based, in part, on future
rental cash flows, sale of the property to KSG may be delayed until the dispute
is settled.
In connection with a Holiday Inn product improvement plan, the
Partnership anticipates that it will be required to make certain improvements to
the hotel property in order to retain its Holiday Inn affiliation. The amount
required for such improvements has not yet been determined.
As more fully described in Note 7 to the Consolidated Financial
Statements, the General Partners have distributed to Limited Partners a consent
solicitation which proposes an exchange of limited partnership units for
securities in a publicly-traded limited liability company. The exchange would
not result in a taxable event to the limited partners, and the General Partners
believe that this proposed transaction will provide limited partners with
liquidity on a tax-effective basis. There is no assurance that the proposed
transaction will be completed.
11
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
PART II
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended September 30, 1997 the Partnership
was not required to file any reports on Form 8-K.
12
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
SIGNATURES
Pursuant to the requirements 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
By: SEVENTH CAREY CORPORATE PROPERTY, INC.
11/07/97 By: /s/ Steven M. Berzin
-------- --------------------
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/07/97 By: /s/ Claude Fernandez
-------- --------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)