--------------------------
OMB APPROVAL
--------------------------
UNITED STATES OMB Number 3235-0070
SECURITIES AND EXCHANGE COMMISSION Expires October 31, 1995
Washington, D.C. 20549 Estimated average burden
hours per response 190.00
--------------------------
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 March 31, 1995
-------------------------
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
----------------------- ----------------------
Commission file number 0-10322
----------------------------------------------------------
CORPORATE PROPERTY ASSOCIATES 3
- - - - - - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2708080
- - - - - - - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
- - - - - - - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 492-1100
- - - - - - - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - - - - - - --------------------------------------------------------------------------------
(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
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
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
INDEX
Page No.
--------
PART I
------
Item 1. - Financial Information*
Balance Sheets, December 31, 1994 and
March 31, 1995 2
Statements of Income for the three
months ended March 31, 1994 and 1995 3
Statements of Cash Flows for the three
months ended March 31, 1994 and 1995 4
Notes to Financial Statements 5-7
Item 2. - Management's Discussion of Operations 8
PART II
-------
Item 6. - Exhibits and Reports on Form 8-K 9
Signatures 10
*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.
- 1 -
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
PART I
------
Item 1. - FINANCIAL INFORMATION
-------------------------------
BALANCE SHEETS
December 31, March 31,
1994 1995
------------- ------------
(Note) (Unaudited)
ASSETS:
Land and buildings, net of
accumulated depreciation of
$976,612 at December 31, 1994 and
$1,026,736 at March 31, 1995 $ 4,793,315 $ 4,743,191
Net investment in direct
financing lease 33,415,760 33,415,618
Real estate held for sale 9,400,000 9,400,000
Cash and cash equivalents 8,851,419 7,065,316
Accrued interest and rents receivable 524,060 532,904
Other assets 64,971 119,358
----------- -----------
Total assets $57,049,525 $55,276,387
=========== ===========
LIABILITIES:
Mortgage notes payable $15,624,196 $13,955,825
Accrued interest payable 351,372 452,123
Accounts payable and accrued expenses 428,778 130,564
Prepaid rental income 38,695 38,695
Purchase installments 13,080,601 13,275,601
----------- -----------
Total liabilities 29,523,642 27,852,808
----------- -----------
PARTNERS' CAPITAL:
General Partners 46,541 44,495
Limited Partners (66,000 Limited
Partnership Units issued and
outstanding) 27,479,342 27,379,084
----------- -----------
Total partners' capital 27,525,883 27,423,579
----------- -----------
Total liabilities and
partners' capital $57,049,525 $55,276,387
=========== ===========
The accompanying notes are an integral part of the financial statements.
Note: The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date.
- 2 -
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31, 1994 March 31, 1995
------------------ --------------
Revenues:
Interest income from direct financing
leases $1,764,006 $1,696,983
Rental income from operating leases 71,945 71,945
Other interest income 15,153 6,662
Other income 47,997
---------- ----------
1,851,104 1,823,587
---------- ----------
Expenses:
Interest on mortgages 413,439 382,376
Depreciation 39,730 50,124
General and administrative 76,879 115,500
Property expense 154,965 204,494
Amortization 5,601 5,601
---------- ----------
690,614 758,095
---------- ----------
Net income $1,160,490 $1,065,492
========== ==========
Net income allocated
to General Partners $ 23,210 $ 21,310
========== ==========
Net income allocated
to Limited Partners $1,137,280 $1,044,182
========== ==========
Net income per Unit:
(66,000 Limited
Partnership Units) $17.23 $15.82
====== ======
The accompanying notes are an integral part of the financial statements.
- 3 -
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
------------------
1994 1995
---- ----
Cash flows from operating activities:
Net income $ 1,160,490 $ 1,065,492
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 45,331 55,725
Other noncash items 2,178 142
Net change in operating assets and liabilities 78,154 (266,295)
----------- -----------
Net cash provided by operating activities 1,286,153 855,064
----------- -----------
Cash flows from investing activities:
Payments received in connection with
exercise of purchase option 571,548 195,000
----------- -----------
Net cash provided by investing activities 571,548 195,000
----------- -----------
Cash flows from financing activities:
Distributions to partners (1,163,082) (1,167,796)
Prepayment of mortgage notes payable (1,320,347)
Payments on mortgage principal (350,556) (348,024)
----------- -----------
Net cash used in financing activities (1,513,638) (2,836,167)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 344,063 (1,786,103)
Cash and cash equivalents, beginning of period 8,027,612 8,851,419
----------- -----------
Cash and cash equivalents, end of period $ 8,371,675 $ 7,065,316
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 416,214 $ 281,625
=========== ===========
The accompanying notes are an integral part of the financial statements.
- 4 -
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO 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 thereto included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1994.
Note 2. Distributions to Partners:
-------------------------
Distributions declared and paid to partners during the three months ended
March 31, 1995 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
----------------- ---------------- ---------------- ------------------------
December 31, 1994 $23,356 $1,144,440 $17.34
======= ========== ======
A distribution of $17.39 per Limited Partner Unit for the quarter ended March
31, 1995 was declared and paid in April 1995.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month periods ended March 31, 1994 and 1995, the Partnership
incurred management fees of $52,447 and $28,356, respectively, and general and
administrative expense reimbursements of $21,982 and $22,230, respectively,
payable to an affiliate.
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 three months ended
March 31, 1994 and 1995 were $12,311 and $35,169, respectively.
Note 4. Industry Segment Information:
----------------------------
The Partnership's operations consist of the investment in and the leasing of
industrial and commercial real estate. For the three-month periods ended
March 31, 1994 and 1995, the Partnership earned its total operating revenues
(rental income plus interest income from financing leases) from the following
lease obligors:
1994 % 1995 %
---------- ---- ---------- ----
Gibson Greetings, Inc. $1,490,522 81% $1,490,522 84%
AT&T Corporation 114,413 6 114,527 7
New Valley Corporation 159,071 9 91,934 5
Hughes Markets, Inc. 71,945 4 71,945 4
---------- --- ---------- ---
$1,835,951 100% $1,768,928 100%
========== === ========== ===
- 5 -
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Prepayment of Mortgage Notes Payable:
------------------------------------
On February 23, 1995, the Partnership paid off three mortgage loans on
properties formerly leased to New Valley Corporation ("New Valley") in
Moorestown, New Jersey and Reno, Nevada and a property in Bridgeton, Missouri,
currently leased to New Valley. The aggregate prepayment made by the
Partnership was $1,320,347. As a result of the prepayment, the Partnership's
annual debt service will decrease by $555,673. The loans had been scheduled
to fully amortize between April 1997 and May 1998.
Note 6. Property in Moorestown, New Jersey:
----------------------------------
On April 7, 1995, the Partnership and Corporate Property Associates 2
("CPA(R):2"), an affiliate, which own the Moorestown, New Jersey property as
tenants-in-common, entered into a net lease for the property with Sports &
Recreation, Inc. ("Sports & Recreation") which intends to convert the facility
into a retail store.
The lease provides for a feasibility period through September 30, 1995 which
is extendable through December 31, 1995 followed by an initial term of 16
years. If, during the feasibility period, Sports & Recreation is unable to
meet conditions necessary to retrofit the facility to its specifications or
obtain certain approvals from the municipal authorities, it has the right to
terminate the lease. During the feasibility period, the Partnership and
CPA(R):2 will reimburse Sports & Recreation for certain planning costs up to a
maximum of $24,000. Sports & Recreation will incur all costs of retrofitting
the facility; however, the Partnership and CPA(R):2 will reimburse Sports &
Recreation for the cost of removing and disposing of the roof and HVAC system,
replacement of the HVAC system and installing a new roof and drainage system.
During the 16 year lease term, which is scheduled to commence at the end of
the feasibility period, annual rentals will initially be $308,750 (of which
the Partnership's share is approximately $187,750) during the first five lease
years with stated increases every five years thereafter. There is no
assurance that Sports & Recreation will lease the property after the
feasibility period.
Note 7. The Leslie Fay Company:
----------------------
During 1991, The Leslie Fay Company ("Leslie Fay") informed the Partnership
that it was exercising an option to purchase its leased property from the
Partnership as of April 30, 1992. Under the lease's purchase option, Leslie
Fay's purchase exercise price is the greater of $9,400,000, the Partnership's
purchase price for the property in 1982, or the fair market value of the
property as impacted by the lease as of the option exercise date. Under the
agreement, fair market value is to be determined by an appraisal process if a
price could not be agreed upon, and that process was underway when, on January
20, 1992, Leslie Fay filed suit in Pennsylvania Court of Common Pleas' of
Luzerne County against the Partnership asking the court to intervene in order
to determine the contractual interpretation of fair market value. On April
20, 1992, the court ruled in favor of the Partnership by declaring, in effect,
that the fair market value should be determined pursuant to the process
provided for in the Leslie Fay lease purchase option, and not by the court.
Leslie Fay appealed the court's decision. On December 1, 1992, the
Pennsylvania Superior Court upheld the ruling of the Court of Common Pleas' in
favor of the Partnership. The Superior Court ruled that the appraisal process
was to proceed pursuant to the terms of the lease. Leslie Fay applied for
reargument before the Superior Court, but on February 5, 1993, its application
was denied. On March 8, 1993, Leslie Fay petitioned the Pennsylvania Supreme
Court for allowance of an appeal of the Superior Court decision. On July 6,
1993, the Pennsylvania Supreme Court denied Leslie Fay's petition.
On June 11, 1992, Leslie Fay filed a second lawsuit in Commonwealth Court
seeking a transfer of the property and other benefits of ownership. The court
ordered Leslie Fay to pay $7,200,000 to the Partnership as partial payment for
the purchase of the Leslie Fay property, post a surety bond for $15,000,000
and to continue
- 6 -
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
making its monthly payments of $190,516 to the Partnership, for application of
these payments to the purchase price. The Partnership received the $7,200,000
on June 19, 1992. As the court has ruled that Leslie Fay's monthly payments
are to be credited toward the purchase price, such payments have been recorded
as installment payments and the investment in the property has been classified
as real estate held for sale. The Partnership is entitled to receive interest
at the rate of 12% per annum on the difference between the ultimate purchase
price and $7,200,000. Leslie Fay, in turn, will be credited with interest at
the rate of 12% per annum from the Partnership on Leslie Fay's monthly
payments, which aggregate $6,075,601 through December 31, 1994. For financial
reporting purposes, the Partnership has accrued interest on the difference
between the minimum sales price ($9,400,000) and $7,200,000 as well as
interest on the monthly installments received and included the net effect of
such amounts in accrued interest payable and the current period effect in
other interest income.
On April 5, 1993 (the "Filing Date"), Leslie Fay filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code. Leslie Fay has
continued to make monthly payments to the Partnership during the course of the
Chapter 11 case.
After the Filing Date, the Partnership filed a proof of claim against Leslie
Fay for in excess of $26,000,000 based on the exercise of the purchase option.
Leslie Fay objected to the Partnership's claim and filed an action in the
Bankruptcy Court against the Partnership asserting that: (i) the Partnership's
damage claims against Leslie Fay should be limited by a cap imposed on lease
termination claims under the Bankruptcy Code (the "Damage Cap Claim"); or,
alternatively (ii) the Leslie Fay agreement should be recharacterized as a
secured financing agreement rather than a true lease (the "Recharacterization
Claim").
The Partnership filed a motion to dismiss Leslie Fay's action, which motion
was denied by the Court as to the Recharacterization Claim. With respect to
the Damage Cap Claim, the Court determined that the statutory damage cap
applicable to lease termination claims under the Bankruptcy Code would not
apply to the Partnership's claims against Leslie Fay; however, the Court
declined to dismiss Leslie Fay's action insofar as Leslie Fay seeks recovery
of payments to the Partnership in excess of the allowed amount of the
Partnership's claims against Leslie Fay. Leslie Fay has filed an amended
complaint, asserting, in addition to the Recharacterization Claim, a cause of
action to extinguish the surety bond issued in favor of the Partnership. If
Leslie Fay succeeds on its Recharacterization Claim, then Leslie Fay contends
that the Partnership's claim would be $9,400,000 plus interest and that any
excess over that aggregate amount and the sum of the $7,200,000 payment plus
the monthly payments thereafter made by Leslie Fay (as adjusted) must be
returned to Leslie Fay.
The Partnership is actively contesting Leslie Fay's action. In that regard,
the Partnership has asserted counterclaims against Leslie Fay and the issuer
of the surety bond for the balance of the purchase price together with
interest and costs, and a counterclaim against Leslie Fay for fraud in the
event the Court decides the Recharacterization Claim in Leslie Fay's favor.
The outcome of the Partnership's claims against Leslie Fay and the surety and
Leslie Fay's action against the Partnership cannot be determined at this time.
In December 1994, Leslie Fay filed a motion asserting the monthly installment
payments should be reduced to the fair market rental value of the premises.
To resolve that dispute, effective January 1, 1995, pursuant to an agreement
between the Partnership and Leslie Fay, the monthly installments have been
reduced to $65,000. The reduction is without prejudice to any party's right
to revisit the issue as to what the appropriate monthly installment should
have been.
The Partnership, Leslie Fay and the issuer of the surety bond have negotiated
a resolution to the dispute and have reached an agreement in principle;
however, such agreement is subject to satisfactory documentation and the
approval of the Bankruptcy Court. Accordingly, there can be no assurance that
the agreement will be finalized in its current form.
- 7 -
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Net income decreased for the three-month period ended March 31, 1995 as
compared with the three-month period ended March 31, 1994. The decrease in
net income is due to a decrease in lease revenues and an increase in property
and general and administrative expenses. This was partially offset by other
income of $48,000 and a decrease in interest expense. The decrease in lease
revenues is due solely to the termination of the lease with New Valley
Corporation ("New Valley") for a property in Reno, Nevada on December 31,
1994. The increase in property expenses is due to the costs of maintaining
and remarketing the Reno property as well as legal costs incurred in
connection with protecting the Partnership's interests in its dispute with the
Leslie Fay Company. The increase in general and administrative expenses is
due to increased occupancy costs during the period under the cost sharing
agreement which are expected to moderate over the remainder of the year.
Other income reflects the benefit from a concession allowed to the Partnership
by a vendor which had been fully accrued as a payable at December 31, 1994.
As lease revenues from Gibson Greetings, Inc. ("Gibson") represent 84% of the
Partnership's lease revenues, any adverse changes in Gibson's financial
condition may significantly affect the Partnership's operating cash flow. It
is currently expected that Gibson will meet all its obligations under its
lease which has an initial term which expires in 2002.
There has been no material change in the Partnership's financial condition
since December 31, 1994 and Management believes that the current cash balance
of $7,065,000 and cash provided from operating activities will be sufficient
to meet the Partnership's current cash requirements which currently consist
primarily of paying quarterly distributions and meeting the scheduled debt
service obligation on the Gibson Greetings, Inc. ("Gibson") properties. With
loan prepayments of $1,320,000 during the quarter which satisfied the mortgage
obligations on three properties, the Gibson properties are the only
Partnership properties which remain encumbered by nonrecourse mortgage debt.
As a result of prepaying the three mortgage loans, annual debt service
requirements will decrease by $556,000. To the extent that Sports &
Recreation, Inc. is able to meet the conditions necessary to retrofit the
Moorestown property to use as a retail store, the Partnership will be
committed to pay its share of costs for rehabilitation of the roof and
heating, ventilation and air conditioning systems. Although such costs are in
the process of being determined, Management believes that such costs can be
funded from existing cash reserves, if necessary. As a result of the
terminations of the New Valley leases for the Reno and Moorestown properties
in December 1994 and May 1993, respectively, pursuant to New Valley's petition
of voluntary bankruptcy, the Partnership anticipates that it will receive a
payment of its claim against New Valley; however, the amount of such payment
has not yet been determined. In addition, the Partnership has agreed to
settle its dispute with The Leslie Fay Company; however, such settlement is
subject to satisfactory documentation and approval of the Bankruptcy Court.
- 8 -
CORPORATE PROPERTY ASSOCIATES 3
(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 March 31, 1995, the Partnership was not
required to file any reports on Form 8-K.
- 9 -
CORPORATE PROPERTY ASSOCIATES 3
(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 3
(a California limited partnership)
By: W.P. CAREY & CO., INC.
05/10/95 By: /s/ Claude Fernandez
-------------- ------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
05/10/95 By: /s/ Michael D. Roberts
-------------- -------------------------------
Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
- 10 -