1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended DECEMBER 31, 1997
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-10322
CORPORATE PROPERTY ASSOCIATES 3
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2708080
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 492-1100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to 12(g) of the Act:
SUBSIDIARY PARTNERSHIP UNITS
(Title of Class)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of
Registrant: There is no active market for Subsidiary Partnership Units.
2
PART I
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 November 7, 1980. Effective January 1, 1998, the General
Partner of Registrant is Carey Diversified LLC ("Carey Diversified"). W. P.
Carey & Co., Inc. and William P. Carey were formerly Corporate General Partner
and Individual General Partner, respectively. Carey Diversified is also the
General Partner of Corporate Property Associates ("CPA(R):1"), Corporate
Property Associates 2 ("CPA(R):2"), 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 7 - a California limited partnership
("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited
partnership ("CPA(R):8") and Corporate Property Associates 9, L.P., a Delaware
limited partnership ("CPA(R):9"). Registrant has entered into an agreement with
Carey Management LLC ("Carey Management") pursuant to which Carey Management
performs a variety of management services for Registrant.
Registrant has only one industry segment which consists of the
investment in and the leasing of industrial and commercial real estate. See
Selected Financial Data in Item 6 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.
Registrant's entire net proceeds from the public offering, less any return of
capital and the working capital reserve have been fully invested in net leased
commercial and industrial real estate since June 1, 1983, the date of
Registrant's final real estate acquisition.
For the year ended December 31, 1997, revenues from properties
occupied by lease obligors which accounted for 10% or more of leasing revenues
of Registrant were as follows: Gibson Greetings, Inc. ("Gibson"), 42%, CSS
Industries, Inc./Cleo, Inc. ("Cleo"), 22% and Hughes Markets, Inc. ("Hughes"),
15%. No other property owned by Registrant accounted for 10% or more of its
total operating revenues during 1997. See Note 8 to the Financial Statements in
Item 8. CSS and Gibson are publicly traded companies. For the year ended
December 31, 1996, CSS' audited financial statements reported revenues of
$412,079,000, net income of $22,344,000, total assets of $346,364,000 and
shareholders' equity of $176,752,000. For the nine-month period ended September
30, 1997, CSS unaudited financial statements reported revenues of $243,606,000,
net income of $7,625,000, total assets of $405,840,000 and total shareholders'
equity of $185,978,000. For the year ended December 31, 1996, Gibson's audited
financial statements reported revenues of $390,246,000, a net income of
$21,960,000, total assets of $451,559,000 and shareholders' equity of
$256,316,000. Gibson's unaudited financial statements for the nine-month period
ended September 30, 1997 reported revenues of $284,421,000, net income of
$14,095,000, total assets of $434,908,000 and shareholders' equity of
$274,321,000.
All of Registrant's properties are leased to corporate tenants
under long-term net leases. A net lease generally requires tenants to pay all
operating expenses relating to the leased properties including maintenance, real
estate taxes, insurance and utilities which under other forms of leases are
often paid by the lessor. Lessees are required to include Registrant as an
additional insured party on all insurance policies relating to the leased
properties. In addition, substantially all of the net leases include
indemnification provisions which require the lessees to indemnify Registrant and
the General Partner for liabilities on all matters relating to the leased
properties. Registrant believes that the insurance and indemnity provided on its
behalf by its lessees provides adequate coverage for property damage and any
liability claims which may arise against Registrant's ownership interests. In
addition to the insurance and indemnification provisions of the lease,
Registrant has contingent property and liability insurance for its leased
properties. To the extent that any lessees are not financially able to satisfy
indemnification obligations which exceed insurance reimbursements, Registrant
may incur the costs necessary to repair property and settle liabilities.
Presently there are no claims pending for property damages or liability claims.
-1-
3
As described above, lessees retain the obligation for the
operating expenses of their leased properties so that, other than rental income,
there are no significant operating data (i.e. expenses) reportable on
Registrant's leased properties. As discussed in Registrant's Management's
Discussion and Analysis in Item 7, Registrant's leases generally provide for
periodic rent increases which are either stated and negotiated at the inception
of the lease or based on formulas indexed to increases in the Consumer Price
Index ("CPI"). Registrant's lease with Hughes for a dairy processing and
distribution facility in Los Angeles, California expires April 1998. Hughes is
obligated to pay Registrant a lump sum of approximately $587,000 in April 1998.
Such lump sum payment is supported by an irrevocable letter of credit. On June
20, 1997, Registrant and CPA(R):4 entered into a net lease agreement for the Los
Angeles property with Copeland Beverage Group, Inc. ("Copeland"). Copeland's
right of possession of the property and the date which it will be required to
commence paying rent will be the date on or after April 30, 1998 that Hughes
vacates the property. The Copeland lease has an initial term of nine years and
provides for annual rent of $1,800,000 of which Registrant's share is $301,680.
The lease has rent increases scheduled every three years based on a formula
indexed to the CPI. Other than the Hughes lease, all of Registrant's current
lease terms expire between 2001 and 2013 and provide for renewal terms.
Since Registrant has generally invested in properties which
are occupied by a single corporate tenant and subject to long-term leases backed
by the credit of the corporate lessee, most of Registrant's properties have not
been greatly affected by competitive conditions of local and regional real
estate markets. Registrant successfully re-leased the Los Angeles property. In
selecting real estate investments, Registrant's strategy was to identify
properties which included operations of material importance to the lessee so
that the lessee would be more likely to extend its lease beyond the initial term
or exercise a purchase option if such option was provided for in the lease
agreement. Registrant believes that this strategy reduces its exposure to the
competitive conditions of the local and regional real estate markets. Because
Registrant may be affected by the financial condition of its lessees rather than
the competitive conditions of the real estate marketplace, Registrant's strategy
has been to diversify its investments among tenants, property types and
industries in addition to achieving geographical diversification.
As described in Note 9 to the financial statements in Item 8,
in connection with the bankruptcy claim of Registrant and CPA(R):2 against New
Valley Corporation ("New Valley"), the Bankruptcy Court entered a judgment in
January 1998 which awarded Registrant and CPA(R):2 $2,900,000 (of which
Registrant's share is $1,770,000) on their claim. New Valley has elected to
appeal the Bankruptcy Court's judgment to the United States District Court for
the District of New Jersey (Newark). Registrant and CPA(R):2 have cross-appealed
on different issues.
During 1997, Registrant received distributions on the
bankruptcy claim against The Leslie Fay Company ("Leslie Fay") totaling
$1,690,490 consisting of 45,720 shares of common stock of Sassco Fashions, Ltd.
("Sassco"), 22,860 shares of common stock of Leslie Fay and 12.75% senior notes
due March 31, 2004 of Sassco which have a stated principal of $739,592.
Registrant voluntarily contracted for Phase I environmental
reviews of all of its properties in 1993. Registrant believes, based on the
results of such reviews and Phase II environmental reviews of certain of its
properties in 1994, that its properties are in substantial compliance with
Federal and state environmental statutes and regulations. Phase II reviews were
only performed on certain properties based on the recommendations of the Phase I
reviews. 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 many instances,
tenants are actively engaged in the remediation process and addressing
identified conditions. For those conditions which were identified, Registrant
advised its tenants of such findings and of their obligations to perform
additional investigations and any required remediation. Tenants are generally
subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition,
Registrant's leases generally require tenants to indemnify Registrant from all
liabilities and losses related to the leased properties. Accordingly, Management
believes that the ultimate resolution of the aforementioned environmental
matters will not have a material adverse effect on Registrant's financial
condition, liquidity or results of operations.
-2-
4
On October 16, 1997, Registrant distributed a Consent
Solicitation Statement/Prospectus to the Limited Partners that described a
proposal to consolidate Registrant with the other CPA(R) Partnerships. Proposals
that each of the nine CPA(R) limited partnerships be merged with a corresponding
subsidiary partnership of Carey Diversified, of which Carey Diversified is the
general partner, were approved by the Limited Partners of all nine of the CPA(R)
limited partnerships. Each limited partner had the option of either exchanging
his or her limited partnership interest for an interest in Carey Diversified
("Listed Shares") or to retain a limited partnership interest in the subsidiary
partnership ("Subsidiary Partnership Units"). On January 1, 1998, 2,427 holders
representing 64,878 of the 66,000 limited partnership units exchanged such units
for 2,460,368 Listed Shares with 44 holders of the remaining 1,122 limited
partnership units exchanging such units for Subsidiary Partnership Units. The
former General Partners received 295,327 Listed Shares for their interest in
their share of the appreciation in Registrant properties.
The Listed Shares are listed on the New York Stock Exchange.
The Subsidiary Partnership Units provide substantially the same economic
interest and legal rights as those of a limited partnership unit in Registrant
prior to the Consolidation, but are not listed on a securities exchange. A
liquidating distribution to holders of Subsidiary Partnership Units will be made
after an appraisal of Registrant's properties. The date of such an appraisal is
to be no later than December 31, 1998.
Registrant does not have any employees. Carey Management, an
affiliate of the General Partner of Registrant, performs accounting, secretarial
and transfer services for Registrant. Chase Mellon Shareholder Services, Inc.
performs certain transfer services for Registrant and The Chase Manhattan Bank
performs certain banking services for Registrant. In addition, Registrant has
entered into an agreement with Carey Management pursuant to which Carey
Management provides certain management services for Registrant.
Registrant's management company has responsibility for
maintaining Registrant's books and records. An affiliate of the management
company services the computer systems used in maintaining such books and
records. In its preliminary assessment of Year 2000 issues, the affiliate
believes that such issues will not have a material effect on Registrant's
operations; however, such assessment has not been completed. Registrant relies
on its bank and transfer agent for certain computer related services and has
initiated discussions to determine whether they are addressing Year 2000 issues
that might affect Registrant.
-3-
5
Item 2. Properties.
LEASE TYPE OF OWNERSHIP
OBLIGOR TYPE OF PROPERTY LOCATION INTEREST
- --------------- ---------------- -------- ----------------
GIBSON GREETINGS, Land and Manufac- Cincinnati, Ownership of a
INC. turing/Warehouse Ohio and 71.5% interest
Buildings - 2 Berea, Kentucky in land and
locations buildings
CSS INDUSTRIES, Land and Manufacturing/ Memphis, Ownership of a 71.5%
INC./CLEO, INC. Warehouse Building Tennessee interest in land and
building
WESTERN UNION Land and Bridgeton, Ownership of an
FINANCIAL SERVICES, Centralized Missouri approximate 61%
INC. Telephone Bureau interest in land
and building
SPORTS & Land and Moorestown, Ownership of an
RECREATION, INC. Building New Jersey approximate 61%
interest in land
and building
EXCEL Land and Reno, Nevada Ownership of an
COMMUNICATIONS, Building approximate 61%
INC. interest in land
and building
HUGHES MARKETS, Land and Dairy Pro- Los Angeles, Ownership of an
INC. cessing Facility California approximate
16.76% interest
in land and
building
AT&T CORPORATION Land and a Bridgeton, Ownership of an
Computer Center Missouri approximate 61%
interest in land
and building
-4-
6
The material terms of Registrant's leases with its significant
tenants are summarized in the following table:
Partnership's
Share Current Lease
Lease of Current Square Rent Per Expiration Renewal Ownership Terms of
Obligor Annual Rents Footage Sq.Ft.(1) (Mo/Year) Terms Interest Purchase Option
- ----------- ------------ ------- --------- --------- ------- --------------- ---------------
Gibson $2,366,571 1,194,840 2.59 11/2013 YES 71.5% interest; Fair market
Greetings, remaining value as encumbered
Inc. interest owned by the lease
by Corporate
Property Associates
2 ("CPA(R):2")
CSS 1,145,400 1,006,566 1.49 12/2005 YES 71.5% interest; The greater of
Industries, remaining interest fair market value
Inc./Cleo, Inc. owned by CPA(R):2 capped at $11,618,750
by the lease and $10,725,000
Western 399,250 78,080 8.41 11/2001 YES 61% interest; N/A
Union Finan- remaining
cial Services, interest owned
Inc. by CPA(R):2
AT&T 483,055 55,810 14.24 11/2001 YES 61% interest; N/A
Corporation remaining
interest owned
by CPA(R):2
Hughes 225,366 390,000 10.34 04/1998 NO 16.76% interest; N/A
Markets Inc. remaining
interest owned
by Corporate
Property
Associates 4
Sports & 187,657 74,066 4.17 5/2012 YES 61% interest; N/A
Recreation remaining
Inc. interest owned
by CPA(R):2
Excel 323,836 53,158 10.02 12/2002 YES 61% interest; N/A
Commun- remaining
ications, Inc. interest owned
by CPA(R):2
(1) Represents rate for rent per square foot on an annualized basis and when
combined with rents applicable to tenants-in-common.
None of Registrant's properties are encumbered by mortgage debt.
-5-
7
Item 3. Legal Proceedings.
As of the date hereof Registrant is not a party to any
material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Information with respect to matters submitted to a vote of
security holders during the fourth quarter of the year ended December 31, 1997
is hereby incorporated by reference to page 20 of Registrant's Annual Report
contained in Appendix A.
PART II
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 20 of Registrant's Annual Report
contained in Appendix A.
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. 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 4 of Registrant's Annual Report contained in Appendix
A.
Item 8. Financial Statements and Supplementary Data.
The following financial statements and supplementary data are
hereby incorporated by reference to pages 5 to 16 of Registrant's Annual Report
contained in Appendix A:
(i) Report of Independent Accountants.
(ii) Balance Sheets as of December 31, 1996 and 1997.
(iii) Statements of Income for the years ended December 31, 1995, 1996
and 1997.
(iv) Statements of Partners' Capital for the years ended December 31,
1995, 1996 and 1997.
(v) Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997.
(vi) Notes to Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
NONE
-6-
8
PART III
Item 10. Directors and Executive Officers of the Registrant.
Registrant has no officers or directors. The directors and
executive officers of the General Partner, Carey Diversified LLC, are as
follows:
Has Served as a
Director and/or
Name Age Positions Held Officer Since (1)
---- --- -------------- -----------------
Francis J. Carey 72 Chairman of the Board 1/98
Chief Executive Officer
Director
William Polk Carey 67 Chairman of the Executive Committee 1/98
Director
Steven M. Berzin 47 Vice Chairman 1/98
Chief Legal Officer
Director
Gordon F. DuGan 31 President 1/98
Chief Acquisitions Officer
Director
Donald E. Nickelson 64 Chairman of the Audit Committee 1/98
Director
Eberhard Faber, IV 61 Director 1/98
Barclay G. Jones III 37 Director 1/98
Lawrence R. Klein 77 Director 1/98
Charles C. Townsend, Jr. 69 Director 1/98
Reginald Winssinger 55 Director 1/98
Claude Fernandez 45 Executive Vice President 1/98
- Financial Operations
John J. Park 33 Executive Vice President 1/98
Chief Financial Officer
Treasurer
H. Augustus Carey 40 Senior Vice President 1/98
Secretary
Samantha K. Garbus 29 Vice President - Asset Management 1/98
Susan C. Hyde 29 Vice President - Shareholder Services 1/98
Robert C. Kehoe 37 Vice President - Accounting 1/98
Edward V. LaPuma 24 Vice President - Acquisitions 1/98
William Polk Carey and Francis J. Carey are brothers. H.
Augustus Carey is the nephew of William Polk Carey and the son of Francis J.
Carey.
-7-
9
A description of the business experience of each officer and
director of the Corporate General Partner is set forth below:
Francis J. Carey, Chairman of the Board, Chief Executive
Officer and Director, was elected President and a Managing Director of W. P.
Carey & Co. ("W.P. Carey") in April 1987, having served as a Director since its
founding in 1973. Prior to joining the firm full-time, he was a senior partner
in Philadelphia, head of the Real Estate Department nationally and a member of
the executive committee of the Pittsburgh based firm of Reed Smith Shaw &
McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships,
W.P. Carey and some of its affiliates. 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. He has also
served as a member of the Board of Trustees of the Investment Program
Association since 1990 and on the Business Advisory Council of the Business
Council for the United Nations since 1994. He holds A.B. and J.D. degrees from
the University of Pennsylvania.
Gordon F. DuGan, President, Chief Acquisitions Officer and
Director, was elected Executive Vice President and a Managing Director of W.P.
Carey in June 1997. Mr. Dugan rejoined W.P. Carey as Deputy Head of Acquisitions
in February 1997. Mr. Dugan was until September 1995 a Senior Vice President in
the Acquisitions Department of W.P. Carey. Mr. Dugan joined W.P. Carey as
Assistant to the Chairman in May 1988, after graduating from the Wharton School
at the University of Pennsylvania where he concentrated in Finance. From October
1995 until February 1997, Mr. Dugan was Chief Financial Officer of
Superconducting Core Technologies, Inc., a Colorado-based wireless
communications equipment manufacturer.
Steven M. Berzin, Vice Chairman, Chief Legal Officer and
Director, was elected Executive Vice President, Chief Financial Officer, Chief
Legal Officer and a Managing Director of W.P. Carey in July 1997. From 1993 to
1997, Mr. Berzin was Vice President - Business Development of General Electric
Capital Corporation in the office of the Executive Vice President and, more
recently, in the office of the President, where he was responsible for business
development activities and acquisitions. From 1985 to 1992, Mr. Berzin held
various positions with Financial Guaranty Insurance Company, the last two being
Managing Director, Corporate Development and Senior Vice President and Chief
Financial Officer. Mr. Berzin associated with the law firm of Cravath, Swaine &
Moore from 1978 to 1985 and from 1976 to 1977, he served as law clerk to the
Honorable Anthony M. Kennedy, then a United States Circuit Judge. Mr. Berzin
received a B.A. and M.A. in Applied Mathematics from Harvard University, a B.A.
in Jurisprudence and an M.A. from Oxford University and a J.D. from Harvard Law
School..
Donald E. Nickelson, Chairman of the Audit Committee and
Director, serves as Chairman of the Board and a Director of Greenfield
Industries, Inc. and a Director of Allied Healthcare Products, Inc. Mr.
Nickelson is Vice-Chairman and a Director of the Harbor Group, a leverage
buy-out firm. He is also a Director of Sugen Corporation and D.T.I. Industries,
Inc. and a Trustee of mainstay Mutual Fund Group. From 1986 to 1988, Mr.
Nickelson was President of PaineWebber Incorporated; from 1988 to 1990, he was
President of the PaineWebber Group; and from 1980 to 1993 a Director. Prior to
1986, Mr. Nickelson served in various capacities with affiliates of PaineWebber
Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a
Director of a diverse group of corporations in the manufacturing, service and
retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles,
Inc. and Motor Wheel Corporation. He is a former Chairman of National Car
Rentals, inc. Mr. Nickelson is also a former Director of the Chicago Board
Options Exchange and is the former Chairman of the Pacific Stock Exchange.
William Polk Carey, Chairman of the Executive Committee and
Director, 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
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 and Commerce, 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, The
James A. Baker III Institute for Public Policy at Rice University, Templeton
College of
-8-
10
Oxford 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. Mr. Carey is also a Director of CPA(R):10, CIP(TM)
and CPA(R):12.
Eberhard Faber IV, is currently a Director of PNC Bank, N.A.,
Chairman of the Board and Director of the newspaper Citizens Voice, a Director
of Ertley's Motorworld, Inc., Vice-Chairman of the Board of King's College and a
Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and
Chief Executive Officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber
also served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern bank from 1980 to 1993.
Barclay G. Jones III, Executive Vice President, Managing
Director, and 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, Director, 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.
Charles C. Townsend, Jr., Director, currently is an Advisory
Director of Morgan Stanley & Co., having held such position since 1979. Mr.
Townsend was a Partner and a Managing Director of Morgan Stanley & Co. from 1963
to 1978 and served as Chairman of Morgan Stanley Realty Corporation from 1977 to
1982. Mr. Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from
Harvard University. Mr. Townsend serves as Director of CIP(TM) and CPA(R)14.
Reginald Winssinger, Director, is currently Chairman of the
Board and Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed
portfolios of diversified real estate assets exceeding $500 million throughout
the United States for more than 20 years. Mr. Winssinger is active in the
planning and development of major land parcels and has developed 20 commercial
properties. Mr. Winssinger is a native of Belgium with more than 25 years of
real estate practice, including 10 years based in Brussels, overseeing
appraisals, construction and management. Mr. Winssinger holds a B.S. in
Geography from the University of California at berkeley and received a degree in
Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary
Belgium Consul to the State of Arizona, a position he has held since 1991.
Claude Fernandez, Executive Vice President - Financial
Operations, 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 a 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.
John J. Park, Executive Vice President, Chief Financial
Officer 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.
H. Augustus Carey, Senior Vice President and Secretary,
returned to W.P. Carey in 1988 and is President of W.P. Carey's broker-dealer
subsidiary. 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.
-9-
11
Samantha K Garbus, Vice President - Director of Asset
Management, became a Second Vice President of W.P. Carey in April 1995 and a
Vice President in April 1997. Ms. Garbus joined W. P. Carey as a Property
Management Associate in January 1992. Ms. Garbus received a B.A. in History from
Brown University in May 1990 and an M.B.A. from the Stern School of New York
University in January 1997.
Susan C. Hyde, Vice President - Director of Shareholder
Services, joined W. P. Carey in 1990, became a Second Vice President in April
1995 and a Vice President in April 1997. Ms. Hyde graduated from Villanova
University in 1990 where she received a B.S. in Business Administration with a
concentration in Marketing and a B.A. in English.
Robert C. Kehoe, Vice President - Accounting, joined W.P.
Carey as a Senior Accountant in 1987. Mr. Kehoe became a Second Vice President
of W. P. Carey in April 1992 and a Vice President in July 1997. Prior to joining
the company, Mr. Kehoe was associated with Deloitte, Haskins & Sells for three
years and was Manager of Financial Controls at CBS Educational and Professional
Publishing for two years. Mr. Kehoe received a B.S. in Accounting from Manhattan
College in 1982 and an M.B.A. in Finance from Pace University in 1993.
Edward V. LaPuma, Vice President - Acquisitions, joined W. P.
Carey as an Assistant to the Chairman in July 1995, became a Second Vice
President in July 1996 and a Vice President in April 1997. A graduate of the
University of Pennsylvania, Mr. LaPuma received a B.A. in Global Economic
Strategies from The College of Arts and Sciences and a B.S. in Economics with a
Concentration in Finance from the Wharton School.
Item 11. Executive Compensation.
Until January 1, 1998, under the Amended Agreement of Limited
Partnership of Registrant (the "Agreement"), 1.9% of Distributable Cash From
Operations, as defined, was payable to the Corporate General Partner and .1% of
Distributable Cash From Operations was payable to the former Individual General
Partner. The former Corporate General Partner and the former Individual General
Partner received $63,518 and $3,339 respectively, from Registrant as their share
of Distributable Cash From Operations during the year ended December 31, 1997.
As owner of 200 Limited Partnership Units, the former Corporate General Partner
received cash distributions of $9,932 ($49.66 per Unit) during the year ended
December 31, 1997. 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 former Corporate
General Partner or any other affiliate of Registrant during the year ended
December 31, 1997.
In the future, a special limited partner, Carey Management
LLC, will receive 1.9% of Distributable Cash From Operations, and William Polk
Carey, the former Individual General Partner will receive .1% of Distributable
Cash From Operations and each will be allocated the same percentage of the
profits and losses of Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
As of December 31, 1997, no person owned of record, or was
known by Registrant to own beneficially more than 5% of the Registrant.
-10-
12
The following table sets forth as of March 20, 1998 certain
information as to the ownership by directors and executive officers of
securities of the General Partner of Registrant:
Number of Listed
Name of Shares and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
Listed Shares William Polk Carey
Francis J. Carey
Steven M. Berzin
Gordon F. DuGan
Donald E. Nickelson
Eberhard Faber IV
Barclay G. Jones III
Lawrence R. Klein
Charles C. Townsend, Jr.
Reginald Winssinger
John J. Park
Claude Fernandez
H. Augustus Carey
Susan K. Garbus
Susan C. Hyde
Robert C. Kehoe
Edward V. LaPuma
All executive officers
and directors as a
group (17 persons)
In connection with Consolidation of Registrant into Carey
Diversified LLC, effective January 1, 1998, no officer or director, other than
William Polk Carey, owns a direct interest in Registrant. William Polk Carey
owns a 0.1% interest in Registrant as a special limited partner and has a
controlling interest in Carey Management LLC which owns a 1.9% interest in
Registrant as a special limited partner. Effective January 1, 1998, Carey
Diversified owns an approximate 96% interest in Registrant.
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. 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 Financial Statements contained in Item 8. Michael B.
Pollack and Senior Vice President, is a partner of Reed Smith Shaw & McClay
which is engaged to perform legal services for Registrant. Mr. Pollack was the
Secretary, until July 1997, of the former Corporate General Partner.
No officer or director of the Corporate General Partner 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.
-11-
13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) 1. Financial Statements:
The following financial statements are filed as a part of this
Report:
Report of Independent Accountants.
Balance Sheets, December 31, 1996 and 1997.
Statements of Income for the years ended December 31, 1995, 1996 and 1997.
Statements of Partners' Capital for the years ended December 31, 1995, 1996 and
1997.
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.
Notes to Financial Statements.
The financial statements are hereby incorporated by reference to pages 5 to
16 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, 1997.
Notes to Schedule III.
Schedule III and notes thereto are hereby incorporated by reference to pages
17 to 18 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 Financial
Statements, including the Notes thereto, or because the conditions requiring
their filing do not exist.
-12-
14
(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.
Exhibit Method of
No. Description Filing
- -------- ----------- ------------------------
3.1 Amended Agreement of Limited Partnership of Exhibit 3(B) to Regis-
Registrant dated as of June 1, 1981. tration Statement (Form
S-11) No. 2-70773
4.1 Deed from Western Union Realty Corporation Exhibit 10(H)(3) to Post-
("WURC") to Corporate Property Associates 2 Effective Amendment No. 1
("CPA(R):2") and Registrant, as tenants in to Registration Statement
common, dated November 16, 1981. (Form S-11) No. 2-70773
4.6 Deed from WURC to CPA(R):2 and Registrant Exhibit 10(H)(13) to Post-
as tenants in common, dated November 16, Effective Amendment No. 1
1981. to Registration Statement
(Form S-11) No. 2-70773
4.10 Deed from WURC to CPA(R):2 and Registrant, as Exhibit 10(H)(23) to Post-
tenants in common, dated November 16, 1981. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
4.15 Deed from WURC to CPA(R):2 and Registrant, as Exhibit 10(H)(33) to Post-
tenants in common, dated November 16, 1981. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
4.43 Agreement for Sale and Sale of Property Exhibit 4.1 to Regis-
and Escrow Instructions, dated October 17, trant's Form 8-K dated
1986, by and between Registrant, CPA(R):4, November 6, 1986
collectively as Seller, and Kraft, Inc.
("Kraft"), as Purchaser.
4.44 Agreement for Sale and Sale of Property Exhibit 4.2 to Regis-
and Escrow Instructions, dated October 17, trant's Form 8-K dated
1986, by and between Registrant, CPA(R):4, November 6, 1986
collectively as Seller, and Hughes Markets,
Inc. ("Hughes"), as Purchaser.
4.45 Letter Agreement dated October 17, 1986 Exhibit 4.3 to Regis-
from Registrant and CPA(R):4, and agreed to trant's Form 8-K dated
and accepted by Kraft and Hughes. November 6, 1986
4.46 Guaranty made as of October 21, 1986 by Exhibit 4.4 to Regis-
Hughes, as Guarantor, to Registrant and trant's Form 8-K dated
CPA(R):4. November 6, 1986
10.1 Contract of Sale dated November 16, 1981 Exhibit 10(H)(1) to Post-
between WURC as seller, and CPA(R):2 and Effective Amendment No. 1
Registrant, as purchasers. to Registration Statement
(Form S-11) No. 2-70773
-13-
15
Exhibit Method of
No. Description Filing
- -------- ----------- ------------------------
10.2 Indenture of Lease dated September 16, Exhibit 10(H)(1) to Post-
1971 between WURC as landlord, and The Effective Amendment No. 1
Western Union Telegraph Company ("WUTCO"), to Registration Statement
as tenant. (Form S-11) No. 2-70773
10.3 Amendment of Lease dated March 27, 1972 Exhibit 10(H)(5) to Post-
between WURC and WUTCO. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
10.4 Second Amendment of Lease dated November 16, Exhibit 10(H)(6) to Post-
1981 between WURC and WUTCO. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
10.5 Assignment of Lease from WUTCO to CPA(R):2 Exhibit 10(H)(7) to Post-
and Registrant, as tenants in common, Effective Amendment No. 1
dated November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773
10.6 Indenture of Lease dated November 14, Exhibit 10(H)(14) to Post-
1972 between WURC, as landlord, and Effective Amendment No. 1
Western Union Corporation ("WUC"), as to Registration Statement
tenant. (Form S-11) No. 2-70773
10.7 Amendment of Lease dated December 12, Exhibit 10(H)(15) to Post-
1972 between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
10.8 Amendment of Lease dated April 30, 1973 Exhibit 10(H)(16) to Post-
between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
10.9 Third Amendment of Lease Agreement dated Exhibit 10(H)(17) to Post-
November 12, 1981 between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
10.10 Assignment of Lease from WURC to CPA(R):2 and Exhibit 10(H)(18) to Post-
Registrant, as tenants in common, dated Effective Amendment No. 1
November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773
10.11 Indenture of Lease dated July 12, 1972 Exhibit 10(H)(24) to Post-
between WURC, as landlord, and WUC, as Effective Amendment No. 1
tenant. to Registration Statement
(Form S-11) No. 2-70773
10.12 Amendment of Lease dated March 1, 1973 Exhibit 10(H)(25) to Post-
between WURC and WUC. Effective Amendment No. 1
to Registration Statement
(Form S-11) No. 2-70773
-14-
16
Exhibit Method of
No. Description Filing
- -------- ----------- ------------------------
10.13 Second Amendment of Lease Agreement Exhibit 10(H)(26) to Post-
dated November 16, 1981 between WURC Effective Amendment No. 1
and WUC. to Registration Statement
(Form S-11) No. 2-70773
10.14 Assignment of Lease from WURC to CPA(R):2 Exhibit 10(H)(27) to Post-
and Registrant, as tenants in common, Effective Amendment No. 1
dated November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773
10.15 Indenture of Lease dated December 18, Exhibit 10(H)(34) to Post-
1973 between WURC, as landlord, and WUC, Effective Amendment No. 1
as tenant. to Registration Statement
(Form S-11) No. 2-70773
10.16 Second Amendment of Lease Agreement Exhibit 10(H)(35) to Post-
dated November 16, 1981 between WURC Effective Amendment No. 1
and WUC. to Registration Statement
(Form S-11) No. 2-70773
10.17 Assignment of Lease from WURC to CPA(R):2 Exhibit 10(H)(36) to Post-
and Registrant, as tenants in common, Effective Amendment No. 1
dated November 16, 1981. to Registration Statement
(Form S-11) No. 2-70773
10.19 Lease Agreement dated January 25, 1982 Exhibit 10(J)(4) to Post-
between CPA(R):2 and Registrant, as landlord, Effective Amendment No. 1
and Gibson as tenant. to Registration Statement
(Form S-11) No. 2-70773
10.22 Management Agreement among Registrant, Exhibit 10(C) to Amendment
and Carey Corporate Property Management, No. 1 to Registration
Inc. Statement (Form S-11)
No. 2-70773
10.23 Support Agreement among Registrant, Exhibit 10(D) to Amendment
Third Carey Corporate Property, Inc. No. 1 to Registration
and W.P. Carey & Co., Inc. Statement (Form S-11)
No. 2-70773
10.24 Lease Agreement dated June 1, 1983 Exhibit 10.1 to Form 8-K
between Registrant and CPA(R):4, as dated June 22, 1983 of
landlord, and Knudsen Corporation CPA(R):4 (Commission File
("Knudsen") as tenant. No. 2-79041
10.25 Agreement dated June 1, 1983 between Exhibit 10.2 to Form 8-K
Registrant and CPA(R):4, as landlord, and dated June 22, 1983 of
Knudsen as tenant. CPA(R):4 (Commission File
No. 2-79041
-15-
17
Exhibit Method of
No. Description Filing
- -------- ----------- ------------------------
10.26 Second Amendment of Lease entered into as Exhibit 10.1 to Regis-
of October 21, 1986, by and between trant's Form 8-K dated
Registrant and CPA(R):4, collectively as November 6, 1986
Landlord, and Santee Dairies, Inc. as
Tenant.
10.27 Lease Agreement dated November 15, 1995 Exhibit 10.27 to Form 10-K
by and between Registrant and CPA(R):2, as dated April 8, 1996
Landlord, and Cleo, Inc., as Tenant.
10.28 Lease Amendment Agreement dated November 15, 1995 Exhibit 10.28 to Form 10-K
by and between Registrant and CPA(R):2, as dated April 8, 1996
Landlord, and Gibson Greetings, Inc., as Tenant.
28.2 Press release regarding Pennsylvania Exhibit 28.1 to Form 8-K
Superior Court decision. dated December 10, 1992.
28.3 Prospectus of Registrant Exhibit 28.3 to Form 10-K/A
dated July 31, 1981. dated September 24, 1993
28.4 Supplement dated December 9, 1981 Exhibit 28.4 to Form 10-K/A
to Prospectus dated July 31, 1981. dated September 24, 1993
28.5 Supplement dated January 8, 1982 Exhibit 28.5 to Form 10-K/A
to Prospectus dated July 31, 1981. dated September 24, 1993
28.6 Supplement dated February 10, 1982 Exhibit 28.6 to Form 10-K/A
to Prospectus dated July 31, 1981. dated September 24, 1993
28.8 Press release dated June 30, 1993 Exhibit 28.1 to Form 8-K
announcing the suspension of secondary dated July 12, 1993
market sales of Limited Partnership Units.
28.9 Compromise and Settlement Agreement dated as of Exhibit 28.1 to Form 8-K
May 1, 1995 between The Leslie Fay Companies, Inc., dated May 1, 1995
Registrant and the Official Committee of Unsecured Creditors
of Leslie Fay and National Union Fire Insurance Company.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K dated January 1,
1998 pursuant to Item 5 - Other Events (EX-99.1 Press Release From W. P. Carey &
Co., Inc. (December 17, 1997)).
-16-
18
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 3
(a California limited partnership)
BY: CAREY DIVERSIFIED LLC
03/23/98 BY: /s/ John J. Park
- -------------- -----------------------
Date John J. Park
Executive Vice President, Chief Financial Officer
and Treasurer
(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: CAREY DIVERSIFIED LLC
03/23/98 BY: /s/ Francis J. Carey
-------- ---------------------------------------------
Date Francis J. Carey
Chairman of the Board, Chief Executive Officer and
Director
(Principal Executive Officer)
03/23/98 BY: /s/ William P. Carey
-------- ---------------------------------------------
Date William P. Carey
Chairman of the Executive Committee and Director
03/23/98 BY: /s/ Steven M. Berzin
-------- ---------------------------------------------
Date Steven M. Berzin
Vice Chairman, Chief Legal Officer and Director
03/23/98 BY: /s/ Gordon F. DuGan
-------- ---------------------------------------------
Date Gordon F. DuGan
President, Chief Acquisitions Officer and Director
03/23/98 BY: /s/ Donald E. Nickelson
-------- ---------------------------------------------
Date Donald E. Nickelson
Chairman of the Audit Committee and Director
03/23/98 BY: /s/ Eberhard Faber IV
-------- ---------------------------------------------
Date Eberhard Faber IV
Director
03/23/98 BY: /s/ Barclay G. Jones, III
-------- ---------------------------------------------
Date Barclay G. Jones, III
Director
03/23/98 BY: /s/ Dr. Lawrence R. Klein
-------- ---------------------------------------------
Date Dr. Lawrence R. Klein
Director
03/23/98 BY: /s/ Charles C. Townsend, Jr.
-------- ---------------------------------------------
Date Charles C. Townsend, Jr.
Director
03/23/98 BY: /s/ Reginald Winssinger
-------- ---------------------------------------------
Date Reginald Winssinger
Director
03/23/98 BY: /s/ John J. Park
-------- ---------------------------------------------
Date John J. Park
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
03/23/98 BY: /s/ Claude Fernandez
-------- ---------------------------------------------
Date Claude Fernandez
Executive Vice President - Financial Operations
(Principal Accounting Officer)
-17-
19
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 3
(A CALIFORNIA LIMITED PARTNERSHIP)
1997 ANNUAL REPORT
20
SELECTED FINANCIAL DATA
(In thousands except per unit amounts)
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
OPERATING DATA:
Revenues $ 7,554 $ 7,392 $ 7,249 $ 5,730 $ 8,105
Net income 2,929 3,215 15,976 4,434 6,644
Net income allocated:
To General Partners 59 64 320 89 133
To Limited Partners 2,870 3,151 15,656 4,345 6,511
Per unit 43.49 47.74 237.21 65.84 98.65
Distributions attributable (1):
To General Partners 93 93 168 66 68
To Limited Partners 4,536 4,568 12,208(2) 3,268 3,330
Per unit 68.72 69.21 184.97 49.51 50.45
BALANCE SHEET DATA:
Total assets 57,171 57,050 33,223 32,530 34,570
Long-term
obligations 15,624 14,026 -- -- --
(1) 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. The distribution
attributable to the fourth quarter of 1997 was paid to Limited Partners
in December 1997.
(2) Includes special distribution of $120 per Limited Partnership Unit in
1995.
-1-
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Net income for the year ended December 31, 1997 increased by
$2,210,000 as compared with net income for the prior year. This increase was due
to an increase in lease revenues (rental income and interest income from direct
financing leases) and nonrecurring other income of $1,690,000.
Lease revenues were $736,000 higher in 1997 due to the
December 1996 commencement of the lease with Excel Communications, Inc. at the
Partnership's property in Reno, Nevada, a full year's rent from the Sports &
Recreation, Inc. lease for the Moorestown, New Jersey property and the benefit
from the May 1996 restructuring of the Hughes Markets, Inc. lease in connection
with extending such lease for an additional two years. Until entering into the
lease with Excel, the Reno property had been vacant since December 1994. Other
income for 1997 of $1,690,000 was received in connection with the Partnership's
bankruptcy claim against the Leslie Fay Company, a former lessee of the
Partnership. Property expenses increased due to legal costs incurred in pursuing
a bankruptcy claim against New Valley Corporation, the former lessee of the Reno
and Moorestown properties which terminated its leases on those properties in
1993 and 1994 under its bankruptcy reorganization plan. This increase was
partially offset by provisions of the Excel and Sports & Recreation leases
requiring the lessees to pay or reimburse the Partnership for all carrying costs
including property related insurance and real estate taxes at the Reno and
Moorestown properties. Prior to the commencement of these leases, the
Partnership had absorbed such costs.
Net income for the year ended December 31, 1996 decreased by
$11,542,000 as compared with net income for 1995 due to a nonrecurring gain in
1995. Excluding the effects of the $11,499,000 gain recognized in 1995 in
connection with a settlement of a dispute with Leslie Fay, an additional
$146,000 writedown in 1995 to net realizable value of the Leslie Fay property
and the nonrecurring amounts included as other income in the accompanying
financial statements for both 1995 and 1996, income was substantially unchanged.
Although income, as adjusted, was stable, there were
significant changes in revenue and interest expense for the comparable years.
The decrease in lease revenues was due to the restructuring of the Gibson
Greetings, Inc. lease in November 1995. The decrease that resulted from the
Gibson restructuring was partially offset by increases from other leases
including increased revenues of $457,000 from the Hughes Markets lease. Under
the Gibson restructuring, the Partnership received substantial consideration in
exchange for reducing Gibson's annual rental obligation, severing a property
from the Gibson master lease to enable the sale of the Cleo Inc. subsidiary to
CSS Industries, Inc. and entering into a lease with Cleo at that property. Under
an extension agreement with Hughes in May 1996, annual rent increased by
$371,000 for the two-year extension term and, in addition, Hughes agreed to make
a lump sum rental payment of $587,000 at the end of the lease term. The decrease
in interest expense was due to the elimination of all the Partnership's mortgage
debt in November 1995, when the loan of $13,191,000 on the Gibson properties was
paid off. Cash flow (rents net of mortgage debt service) from the Gibson and
Cleo properties increased as decreases in scheduled rents of $2,450,000, were
more than offset by the elimination of annual debt service of $2,510,000. Prior
to the restructuring, Gibson represented 81% of the Partnership's lease
revenues. With the restructuring, Gibson accounted for 46% of such revenues in
1996 providing the Partnership with greater diversification of credit risk among
its lessees.
The Hughes Markets lease for a dairy processing plant in Los
Angeles, California is scheduled to expire in April 1998. Copeland Beverage
Group, Inc.'s lease for the property will commence when Hughes Markets vacates
the property. As a result, the lump sum payment of $587,000 due from Hughes
Markets at the end of its lease will not need to be used to retrofit the
property or absorb any costs during a period of vacancy as had originally been
anticipated. Rent from the Copeland Beverage lease will approximate the rent
from the Hughes Markets lease that was in effect prior to the two-year lease
extension.
Sports & Recreation has paid the rent on the Moorestown
property since the inception of its lease in July 1996 but has not occupied the
property and does not intend to do so. The initial term of Sports & Recreation
lease ends May 2012, and Sports & Recreation retains its obligation to pay rent
until the end of such term. The partnership is cooperating with Sports &
Recreation in seeking a new lessee for the property even though it has no
obligation to do so.
-2-
22
Because of the long-term nature of the Partnership's net
leases, inflation and changes in prices have not unfavorably affected the
Partnership's net income or had an impact on the continuing operations of the
Partnership's properties. The leases with Gibson, Western Union Financial
Services, Inc., Sports & Recreation and AT&T provide periodic fixed rent
increases and the lease with Cleo provides for periodic rent increases based on
a formula indexed to increases in the Consumer Price Index.
Financial Condition
The Partnership's cash balances decreased by $773,000 to
$723,000. Cash flow from operations of $4,587,000 was sufficient to pay four
quarterly distributions of $3,344,000, pay off the remaining balance of $500,000
of a note payable to an affiliate and use $645,000 in the first quarter to
retrofit the Reno property and complete its obligation to fund certain
improvements at the inception of the Excel lease. In addition, the Partnership
paid a distribution of $871,000 for the fourth quarter of 1997 which in prior
years had been declared and paid in January.
The distribution paid in December 1997 was due to the exchange
transaction which occurred on January 1, 1998. The majority of the Partnership's
Limited Partners and its General Partners approved a consolidation by merger of
the Partnership with a subsidiary limited partnership of Carey Diversified LLC,
as proposed in the Consent Solicitation Statement/Prospectus of Carey
Diversified dated October 16, 1997. In connection with the merger, 2,427 Limited
Partnership Unitholders owning 64,878 Limited Partnership Units elected to
exchange their limited partnership units for interests in Carey Diversified. The
December 1997 distribution was intended to (a) distribute funds in order to
align the net assets of the Partnership with the estimate of Total Exchange
Value, as defined in the Consent Solicitation Statement/Prospectus, of those
assets and (b) pay the January distribution.
Limited Partners owning 1,122 Limited Partnership Units who
did not elect to receive interests in Carey Diversified elected to retain a
limited partnership interest in the Partnership as a Subsidiary Partnership
Unitholder. Subsidiary Partnership Units have economic interests and legal
rights in the Partnership that are substantially similar to those of Limited
Partnership Units and represent a direct ownership interest in the Partnership.
The holder of Subsidiary Partnership Units will be paid a pro rata share of any
distribution paid by the Partnership to Carey Diversified. The Partnership will
continue to pay distributions on a quarterly basis until liquidating
distributions are made, as described in the Consent Solicitation
Statement/Prospectus. The objective with respect to Subsidiary Partnership Units
will be to pay distributions as if the Consolidation never had occurred based
upon the net cash flows generated by the Partnership.
In January 1998, the Partnership and Corporate Property
Associates 2, an affiliate, which together own properties formerly leased to New
Valley, were awarded $2,900,000 (of which the Partnership's share is $1,770,000)
in their bankruptcy claim against New Valley. New Valley has filed an appeal to
contest the award, and the Partnership and Corporate Property Associates 2 have
cross-appealed on different issues and are seeking to preserve the award.
Accordingly, there is no assurance that the Partnership will receive the full or
any amount from this award.
The Partnership and AT&T Corporation have been discussing the
funding of an expansion of the AT&T facility in Bridgeton, Missouri in exchange
for a lease extension; however, AT&T and the Partnership have not entered into
any commitment to complete a transaction. In the event that an agreement is
reached, the Partnership's share of capital costs would be approximately
$2,200,000. If necessary, any additions could be financed through the
significant borrowing capacity of the Partnership since all its properties are
unleveraged. If the lease with Sports & Recreation is terminated, improvements
would necessary for the remarketing of the Moorestown property. The Partnership
will seek to fund a portion of such improvements through a termination
settlement with Sports & Recreation.
Cleo's option to purchase its property is exercisable at any
time with at least six months' notice. The Partnership's share of the sales
proceeds in the event the option is exercised would range between $10,725,000
and $11,619,000. Annual cash flow (i.e., rent) from the Cleo property is
$1,145,000. The Cleo leases provides for an initial term through December 2005.
-3-
23
All of the Partnership's properties are subject to
environmental statutes and regulations regarding the discharge of hazardous
materials and related remediation obligations. All of the Partnership's
properties are currently leased to corporate tenants. The Partnership generally
structures a lease to require the tenant to comply with all laws. In addition,
substantially all of the Partnership's net leases include provisions that
require tenants to indemnify the Partnership from all liabilities and losses
related to their operations at the leased properties. If the Partnership
undertakes to clean up or remediate any of its properties, the General Partner
believes that in most cases the Partnership will be entitled to reimbursement
from tenants for such costs. In the event that the Partnership absorbs a portion
of such costs, the General Partner believes such expenditures will not have a
material adverse effect on the Partnership's financial condition, liquidity or
results of operations.
In 1994, the Partnership voluntarily conducted Phase II
environmental reviews of certain of its properties based on the results of Phase
I environmental reviews conducted in 1993. The Partnership believes, based on
the results of such reviews, that its properties are in substantial compliance
with Federal and state environmental statutes and regulations. Portions of
certain properties have been documented as having a limited degree of
contamination, principally in connection with either leakage from underground
storage tanks or surface spills from facility activities. For those conditions
that were identified, the Partnership advised the affected tenant of the Phase
II findings and of its obligation to perform required remediation.
In June 1997, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in full set general
purpose financial statements. SFAS No. 130 is required to be adopted by 1998.
The Partnership is currently evaluating the impact, if any, of SFAS No. 130.
The Partnership's management company has responsibility for
maintaining the Partnership's books and records and servicing the computer
systems used in maintaining such books and records. In its preliminary
assessment of Year 2000 issues, the management company believes that such issues
will not have a material effect on the Partnership's operations; however such
assessment has not been completed. The Partnership relies on its bank and
transfer agent for certain computer-related services and has initiated
discussions to determine whether they are addressing Year 2000 issues that might
affect the Partnership.
-4-
24
REPORT of INDEPENDENT ACCOUNTANTS
To the Partners of
Corporate Property Associates 3:
We have audited the accompanying balance sheets of Corporate
Property Associates 3 (a California limited partnership) as of December 31, 1996
and 1997, and the related statements of income, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997. We have also
audited the financial statement schedule included on pages 17 to 18 of this
Annual Report. These financial statements and financial statement schedule are
the responsibility of the General Partners. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the 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 financial position of Corporate
Property Associates 3 (a California limited partnership) as of December 31, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1997, 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 23, 1998
-5-
25
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
BALANCE SHEETS
December 31, 1996 and 1997
1996 1997
----------- -----------
ASSETS:
Real estate leased to others:
Accounted for under the
operating method:
Land $ 1,255,499 $ 1,255,499
Buildings 4,817,871 5,463,016
----------- -----------
6,073,370 6,718,515
Accumulated depreciation 1,364,095 1,579,367
----------- -----------
4,709,275 5,139,148
Net investment in direct financing leases 25,689,201 26,150,174
----------- -----------
Real estate leased to others 30,398,476 31,289,322
Cash and cash equivalents 1,496,001 722,942
Marketable securities, at fair value 1,562,553
Other assets, net of reserve for uncollected
rent of $47,380 in 1997 635,873 995,626
----------- -----------
Total assets $32,530,350 $34,570,443
=========== ===========
LIABILITIES:
Note payable to affiliate $ 500,000
Accounts payable and accrued expenses 63,200 $ 227,952
Prepaid rental income 67,241
Accounts payable to affiliates 73,313 829,894
----------- -----------
Total liabilities 636,513 1,125,087
----------- -----------
Commitments and contingencies
PARTNERS' CAPITAL:
General Partners 214,807 (471,319)
Limited Partners (66,000 Limited
Partnership Units issued and
outstanding) 31,679,030 33,916,675
----------- -----------
Total partners' capital 31,893,837 33,445,356
----------- -----------
Total liabilities and
partners' capital $32,530,350 $34,570,443
=========== ===========
The accompanying notes are an integral part of the financial statements.
-6-
26
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS of INCOME
For the years ended December 31, 1995, 1996 and 1997
1995 1996 1997
----------- ----------- -----------
Revenues:
Rental income $ 290,657 $ 845,257 $ 1,480,890
Interest income from direct financing leases 6,502,361 4,735,487 4,836,315
Other interest Income 230,926 74,338 97,012
Other income 225,321 75,000 1,690,490
----------- ----------- -----------
7,249,265 5,730,082 8,104,707
----------- ----------- -----------
Expenses:
Interest 1,255,047 75,158 17,744
Depreciation 198,590 188,893 215,272
General and administrative 372,006 326,082 380,512
Property expenses 781,442 705,915 847,176
Amortization 19,605
Writedown to fair value 146,184
----------- ----------- -----------
2,772,874 1,296,048 1,460,704
----------- ----------- -----------
Income before gain on settlement 4,476,391 4,434,034 6,644,003
Gain on settlement, net of $7,400,000
writedown to fair value 11,499,176
----------- ----------- -----------
Net income $15,975,567 $ 4,434,034 $ 6,644,003
=========== =========== ===========
Net income allocated to:
Individual General Partner $ 15,976 $ 4,434 $ 6,644
=========== =========== ===========
Corporate General Partner $ 303,536 $ 84,247 $ 126,236
=========== =========== ===========
Limited Partners $15,656,055 $ 4,345,353 $ 6,511,123
=========== =========== ===========
Net income per Unit
(66,000 Limited Partnership
Units outstanding) $ 237.21 $ 65.84 $ 98.65
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
-7-
27
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1995, 1996 and 1997
Partners' Capital Accounts
------------------------------------------------------------------------
Limited
Partners'
General Limited Amount Per
Total Partners Partners Unit (a)
------------ ------------ ------------ ------------
Balance, December 31, 1994 $ 27,525,883 $ 46,541 $ 27,479,342 $ 417
Distributions (12,722,367) (174,447) (12,547,920) (190)
Net income 1995 15,975,567 319,512 15,656,055 237
------------ ------------ ------------ ------------
Balance, December 31, 1995 30,779,083 191,606 30,587,477 464
Distributions (3,319,280) (65,480) (3,253,800) (49)
Net income 1996 4,434,034 88,681 4,345,353 66
------------ ------------ ------------ ------------
Balance, December 31, 1996 31,893,837 214,807 31,679,030 481
Distributions (4,232,724) (84,624) (4,148,100) (63)
Accrued preferred distribution (731,823) (731,823)
Unrealized depreciation,
marketable securities (127,937) (2,559) (125,378) (2)
Net income 1997 6,644,003 132,880 6,511,123 99
------------ ------------ ------------ ------------
Balance, December 31, 1997 $ 33,445,356 $ (471,319) $ 33,916,675 $ 515
============ ============ ============ ============
(a) Based on 66,000 Units issued and outstanding during all periods.
The accompanying notes are an integral part of the financial statements.
-8-
28
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS of CASH FLOWS
For the years ended December 31, 1995, 1996 and 1997
1995 1996 1997
------------ ------------ ------------
Cash flows from operating activities:
Net Income $ 15,975,567 $ 4,434,034 $ 6,644,003
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 218,195 188,893 215,272
Gain on settlement, net (11,499,176)
Restructuring fees received, net of costs 8,150,941
Securities received in connection with settlement (1,690,490)
Straight-line adjustments and other
noncash rent adjustments (26,973) (592,942) (754,273)
Writedown to fair value 146,184
Provision for uncollected rents 47,380
Net change in operating assets and liabilities (47,161) (123,379) 125,152
------------ ------------ ------------
Net cash provided by operating
activities 12,917,577 3,906,606 4,587,044
------------ ------------ ------------
Cash flows from investing activities:
Capitalized costs (303,443) (645,145)
Proceeds from sale of real estate 1,853,816
Proceeds from settlement, net 4,850,869
Payments received in connection with
exercise of purchase option 585,000
------------ ------------ ------------
Net cash provided by (used in)
investing activities 5,435,869 1,550,373 (645,145)
------------ ------------ ------------
Cash flows from financing activities:
Distributions to partners (12,722,367) (3,319,280) (4,214,958)
Payment of note to affiliate (1,800,000) (500,000)
Payment of mortgage principal (1,113,283)
Prepayment of mortgage principal (14,510,913)
Proceeds from issuance of note to affiliate 2,300,000
------------ ------------ ------------
Net cash used in
financing activities (26,046,563) (5,119,280) (4,714,958)
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents (7,693,117) 337,699 (773,059)
Cash and cash equivalents,
beginning of year 8,851,419 1,158,302 1,496,001
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 1,158,302 $ 1,496,001 $ 722,942
============ ============ ============
Supplemental disclosure of noncash financing activities:
Accrued preferred distribution $ 731,823
============
Supplemental cash flows information:
Interest paid $ 1,357,609 $ 97,192 $ 14,192
============ ============ ============
The accompanying notes are an integral part of the financial statements.
-9-
29
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
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 dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The most significant estimates relate to the assessment
of recoverability of real estate assets. 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.
Corporate Property Associates 3 (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 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, rental
revenue is recognized on a straight-line basis over the
term of the leases and expenses (including depreciation)
are charged to operations as incurred.
The Partnership assesses the recoverability of its real estate
assets, including residual interests, based on projections of
undiscounted cash flows over the life of such assets. In the
event that such cash flows are insufficient, the assets are
adjusted to their estimated fair value.
Substantially all of the Partnership's leases provide for either
scheduled rent increases or periodic rent increases based on
formulas indexed to increases in the Consumer Price Index.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of components of the property, which range
from 5 to 36 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, 1996 and
1997 were held in the custody of two financial institutions.
Continued
-10-
30
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Marketable Securities:
The Partnership's marketable securities are classified as
available-for-sale securities and are reported at fair value with
the Partnership's interest in unrealized gains and losses on
those securities reported as a separate component of partner's
capital.
Other Assets:
Included in other assets are deferred costs of Consolidation (see
Note 13) and deferred rental income. Deferred costs of
Consolidation represent certain costs related to a Consolidation
transaction which have been capitalized. Such Consolidation costs
will be included in the revaluation of assets subsequent to
December 31, 1997. Deferred rental income is the aggregate
difference for operating leases between scheduled rents which
vary during the lease term and income recognized on a
straight-line basis.
Reclassification:
Certain 1995 and 1996 amounts have been reclassified to conform to
the 1997 financial statement presentation.
Income Taxes:
A partnership is not liable for Federal income taxes as each
partner recognizes his proportionate share of the partnership
income or loss in his tax return. Accordingly, no provision for
income taxes is recognized for financial statement purposes.
2. Partnership Agreement:
The Partnership was organized on November 7, 1980 under the 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 Partnership will
terminate on December 31, 2018, or sooner, in accordance with the
terms of the Amended Agreement of Limited Partnership (the
"Agreement").
Through December 31, 1997, the Agreement provided that the General
Partners were allocated 2% (0.1% to the Individual General
Partner, and 1.9% to the Corporate General Partner, W.P. Carey &
Co., Inc.( "W.P. Carey")), and the Limited Partners were
allocated 98% of the profits and losses as well as distributions
of Distributable Cash From Operations, as defined in the
Agreement. Effective January 1, 1998, as a result of the merger
(see Note 13) of the Partnership with a subsidiary partnership of
Carey Diversified LLC ("Carey Diversified"), Carey Diversified is
the sole general partner of the Partnership. Carey Diversified
and the holders of Subsidiary Partnership Units are allocated 98%
of the profits and losses and distributable cash, and two special
limited partners, Carey Management LLC ("Carey Management") and
William P. Carey, are allocated 1.9% and 0.1% of the profits and
losses and distributable cash, respectively.
In connection with the merger with Carey Diversified and the listing
on the New York Stock Exchange, the former Corporate General
Partner satisfied the provisions for receiving a subordinated
preferred return of $731,823, which was measured based upon the
cumulative proceeds arising from the sale of the Partnership's
assets. Such amount has been included in accounts payable to
affiliates as of December 31, 1997. The preferred return, paid in
January 1998, was subject to provisions that limited such payment
until a specified cumulative return to limited partners was
achieved. The Exchange Value of a Limited Partnership Unit to a
Listed Share of Carey Diversified was included in calculating the
cumulative return.
Continued
-11-
31
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
3. Transactions with Related Parties:
Under the Agreement, a division of W.P. Carey was also entitled to
receive a property management fee 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 to the operation of
the Partnership. Effective January 1, 1998, the fees and
reimbursements are payable to Carey Management, an affiliate of
Carey Diversified. Property management fee and general and
administrative expense reimbursements are summarized as follows:
1995 1996 1997
---------- ---------- ----------
Property management fee $ 930,191 $ 218,507 $ 353,295
General and administrative
expense reimbursements 86,183 84,519 110,091
---------- ---------- ----------
$1,016,374 $ 303,026 $ 463,386
========== ========== ==========
During 1995, 1996 and 1997, fees and expenses aggregating $96,306,
$284,067 and $159,903, respectively, were incurred for legal
services performed by a firm in which the Secretary, until July
1997, 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. Expenses incurred in 1995, 1996 and 1997 were
$87,907, $67,625 and $43,420, respectively.
The Partnership's ownership interests in certain properties are
jointly held with affiliated entities as tenants-in-common with
the Partnership's undivided ownership interests in such jointly
held properties ranging from 16.76% to 71.5%. 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:
Scheduled future minimum rents, exclusive of renewals, under
noncancelable operating leases amount to approximately $1,323,000
in 1998; $511,000 in each of the years 1999 and 2000; $519,000 in
2001; $554,000 in 2002; and aggregate approximately $5,431,000
through 2012.
Contingent rents were approximately $39,000 in 1995 and $18,000 in
1996. No contingent rents were realized in 1997.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
------------
1996 1997
------------ ------------
Minimum lease payments receivable $ 67,855,219 $ 63,479,874
Unguaranteed residual value 33,409,444 33,409,444
------------ ------------
101,264,663 96,889,318
Less, Unearned income 75,575,462 70,739,144
------------ ------------
$ 25,689,201 $ 26,150,174
============ ============
Continued
-12-
32
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Scheduled future minimum rents, exclusive of renewals, under
noncancelable direct financing leases amount to approximately
$4,339,000 in 1998, $4,321,000 in 1999, $4,360,000 in 2000,
$4,871,000 in 2001 and $4,129,000 in 2002 and aggregate
approximately $63,480,000 through 2013.
Contingent rents were approximately $1,142,000 in 1995. No
contingent rents were realized in 1996 and 1997.
6. Distributions:
Distributions are declared and paid to partners quarterly and are
summarized as follows:
Distributions Paid
Year Ending and Payable to Distributions Paid to Limited Partners'
December 31, General Partners Limited Partners Per Unit Amount
--------------------------- ------------------ --------------------- -----------------
1995
Quarterly distributions $ 94,447 $ 4,627,920 $ 70.12
Special distribution
- Note 10 80,000 7,920,000 120.00
-------- ----------- -------
$174,447 $12,547,920 $190.12
======== =========== =======
1996 $ 65,480 $ 3,253,800 $ 49.30
======== =========== =======
1997 $ 84,624 $ 4,148,100 $ 62.85
======== =========== =======
Distributions for 1997 include distributions of $870,540 to Limited
Partners and $17,766 to General Partners declared in December 1997.
7. 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:
1995 1996 1997
------------ ------------ ------------
Net income per Statements of Income $ 15,975,567 $ 4,434,034 $ 6,644,003
Excess tax depreciation (1,364,376) (880,310) (653,569)
Recognition of purchase installments
as operating income (5,880,601)
Writedown to fair value 7,546,184
Restructuring fee 8,150,941
Other (474,841) (407,625) (487,481)
------------ ------------ ------------
Income reported for Federal income
tax purposes $ 23,952,874 $ 3,146,099 $ 5,502,953
============ ============ ============
Continued
-13-
33
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
8. Industry Segment Information:
The Partnership's operations consist of the investment in and the
leasing of industrial and commercial real estate.
In 1995, 1996 and 1997, the Partnership earned its total operating
revenues (rental income plus interest income from direct
financing leases) from the following lease obligors:
1995 % 1996 % 1997 %
---- --- ---- --- ---- --
Gibson Greetings, Inc. $5,525,671 81% $2,560,499 46% $2,625,246 42%
CSS Industries, Inc./Cleo, Inc. 150,885 2 1,349,237 24 1,386,521 22
Hughes Markets, Inc. 290,657 4 747,946 13 969,397 15
AT&T Corporation 458,275 7 458,807 8 458,785 7
Western Union Financial
Services, Inc. 367,530 6 366,944 7 365,763 6
Excel Communications, Inc. 3,482 323,836 5
Sports & Recreation, Inc. 93,829 2 187,657 3
---------- ---- ---------- ---- ---------- ---
$6,793,018 100% $5,580,744 100% $6,317,205 100%
========== ==== ========== ==== ========== ====
9. Properties Formerly Leased to New Valley Corporation:
The Partnership and Corporate Property Associates 2 ("CPA(R):2"), an
affiliate, own 61% and 39% interests, respectively, in properties
located in Reno, Nevada; Bridgeton, Missouri; and Moorestown, New
Jersey. Until May 1993, the properties were leased to New Valley
Corporation ("New Valley"). On April 1, 1993, New Valley filed a
petition of voluntary bankruptcy seeking reorganization under
Chapter 11 of the United States Bankruptcy Code. In connection
with the bankruptcy filing, the Bankruptcy Court approved New
Valley's termination of its lease with the Partnership and
CPA(R):2 for the Moorestown, New Jersey property in May 1993. In
December 1994, the Bankruptcy Court also approved the termination
of New Valley's lease on the Reno property effective December 31,
1994. Western Union Financial Services, Inc. leases the Bridgeton
property.
In 1995 the Partnership and CPA(R):2 entered into a net lease for
the Moorestown property with Sports & Recreation, Inc. ("Sports &
Recreation"). The agreement provided that after conversion of the
facility into a retail store, a lease term of 16 years with an
initial annual rent of $308,750 (of which the Partnership's share
is $187,750) would commence. During 1996 Sports & Recreation
indicated to the Partnership and CPA(R):2 that it had decided not
to occupy the property and would seek to terminate the lease. At
that time the Partnership and CPA(R):2 rejected as inadequate
Sports & Recreation's termination offer. Sports & Recreation has
paid all scheduled rents. The Partnership and CPA(R):2 will
evaluate any other termination offers from Sports & Recreation.
In August 1996 the Partnership and CPA(R):2 entered into a lease
agreement for the Reno property with Excel Teleservices, Inc.
("Excel"). The lease obligations of Excel have been guaranteed by
its parent company, Excel Communications, Inc. The initial lease
term commenced on December 26, 1996.
In connection with the bankruptcy claim, the Bankruptcy Court
entered a judgment in January 1998 which awarded the Partnership
and CPA(R):2 $2,900,000 (of which the Partnership's share is
$1,770,000) on their claim. New Valley has elected to appeal the
Bankruptcy Court's judgment to the United States District Court
for the District of New Jersey (Newark). The Partnership and
CPA(R):2 have cross-appealed on different issues and are seeking
to preserve the award. There
Continued
-14-
34
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
is no assurance that the Partnership will receive the full amount
or any of the judgment. Accordingly, no amount that the
Partnership may ultimately receive has been recorded in the
accompanying financial statements.
10. Gain on Settlement:
In August 1995, the Partnership reached a settlement with The Leslie
Fay Company ("Leslie Fay") and its surety company regarding
Leslie Fay's lease with the Partnership. In connection with the
settlement, the Partnership recognized a gain of $11,499,176,
which consisted of aggregate net cash received from Leslie Fay
and the surety company of $18,839,750 and the waiving of the
$382,706 of accrued interest, offset by a writedown on the Leslie
Fay property of $7,400,000 and aggregate management fees, payable
to an affiliate, of $323,280 accrued since the beginning of the
dispute in 1992. Under the settlement agreement, Leslie Fay was
required to dismiss with prejudice all of its suits filed against
the Partnership, and established the Partnership's bankruptcy
claim against Leslie Fay, as an unsecured creditor, at
$2,650,000.
As the fair value of the property was no longer affected by the
Leslie Fay lease, the Partnership wrote down the estimated fair
value of the property, net of anticipated selling costs, to
$2,000,000 and recognized a noncash charge of $7,400,000, which
was netted against the 1995 gain on settlement.
As a result of the settlement, a special distribution of $120 per
Limited Partner Unit ($7,920,000) was declared and paid in
October 1995. In 1992, a special distribution of $50 per Limited
Partner Unit ($3,300,000) was paid from the receipt of the
$7,200,000 installment from Leslie Fay.
In January 1996, the Partnership sold the vacant property to a third
party, net of transaction costs, for $1,853,816. The Partnership
recognized an additional writedown on the property to an amount
equal to the net sales proceeds, resulting in a charge to income
in 1995 of $146,184. Accordingly, no gain or loss was recognized
in 1996 in connection with the sale.
During 1997, the Partnership received distributions on the
bankruptcy claim totaling $1,690,490 consisting of 45,720 shares
of common stock of Sassco Fashions, Ltd. ("Sassco"), 22,860
shares of common stock of the Leslie Fay Company, Inc. and 12.75%
senior notes due March 31, 2004 of Sassco which have a stated
principal of $739,592. The securities received, which are carried
as available-for-sale, are stated in the accompanying financial
statements as marketable securities, based on their fair value as
of December 31, 1997.
11. Environmental Matters:
All of the Partnership's properties are subject to environmental
statutes and regulations regarding the discharge of hazardous
materials and related remediation obligations. All of the
Partnership's properties are currently leased to corporate
tenants. The Partnership generally structures a lease to require
the tenant to comply with all laws. In addition, substantially
all of the Partnership's net leases include provisions which
require tenants to indemnify the Partnership from all liabilities
and losses related to their operations at the leased properties.
In the event that the Partnership absorbs a portion of the costs
to comply with environmental statutes, the General Partner
believes such expenditures will not have a material adverse
effect on the Partnership's financial condition, liquidity or
results of operations.
Continued
-15-
35
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
In 1994, based on the results of Phase I environmental reviews
performed in 1993, the Partnership voluntarily conducted Phase II
environmental reviews on four of its properties. The Partnership
believes, based on the results of Phase I and Phase II reviews,
that its properties are in substantial compliance with Federal
and state environmental statutes and regulations. Portions of
certain properties have been documented as having a limited
degree of contamination, principally in connection with surface
spills from facility activities. For those conditions which were
identified, the Partnership advised the affected tenants of the
Phase II findings and of their obligations to perform required
remediation.
12. Disclosures About Fair Value of Financial Instruments:
The carrying amounts of cash, receivables and accounts payable and
accrued expenses approximate fair value because of the short
maturity of these items.
13. Exchange of Limited Partnership Units:
On October 16, 1997, Carey Diversified distributed a Consent
Solicitation Statement/Prospectus to the Limited Partners that
described a proposal to consolidate the Partnership with the
other CPA(R) Partnerships. The General Partners' proposals that
each of the nine CPA(R) limited partnerships be merged with a
corresponding subsidiary partnership of Carey Diversified, of
which Carey Diversified is the general partner, was approved by
the Limited Partners of all nine of the CPA(R) limited
partnerships. Each limited partner had the option of either
exchanging his or her limited partnership interest for an
interest in Carey Diversified ("Listed Shares") or to retain a
limited partnership interest in the subsidiary partnership
("Subsidiary Partnership Units"). On January 1, 1998, 2,427
holders owning 64,878 of the 66,000 limited partnership units
exchanged such units for 2,460,368 Listed Shares with 44 holders
with the remaining 1,122 limited partnership units exchanging
such units for Subsidiary Partnership Units. The General Partners
received 295,327 Listed Shares for its interest in its share of
the appreciation in Partnership properties.
Listed Shares commenced public trading on the New York Stock
Exchange on January 21, 1998. Subsidiary Partnership Units
provide substantially the same economic interest and legal rights
as those of a limited partnership unit in the Partnership, but
are not listed on a securities exchange. A liquidating
distribution to holders of Subsidiary Partnership Units will be
made after an appraisal of the Partnership's properties which
appraisal date is to be no later than December 31, 1998.
14. Accounting Pronouncements:
June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains and losses) in full set general purpose financial
statements. SFAS No. 130 and is required to be adopted by 1998.
The Partnership is currently evaluating the impact, if any, of
SFAS No. 130.
-16-
36
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
Initial Cost to Cost Increase
Partnership Capitalized (Decrease) in
------------------------------ Subsequent to Net
Description Encumbrances Land Buildings Acquisition (a) Investment(b)
----------- ----------- --------------- -------------
Operating Method:
Dairy processing
facility leased to
Hughes Markets, Inc. $ 340,146 $ 1,625,424 $ 4,357
Building leased to
Sports & Recreation, Inc. 411,843 2,983,209 $(1,595,052)
Centralized telephone
bureau leased to
Excel Commun-
ications, Inc. 692,644 2,054,223 952,417 (750,696)
----------- ----------- ----------- -----------
$ 1,444,633 $ 6,662,856 $ 956,774 $(2,345,748)
=========== =========== =========== ===========
Direct financing method:
Centralized telephone
bureau leased to
Western Union
Financial Services, Inc. $ 542,884 $ 3,069,669 $ (56,482)
Computer Center
leased to AT&T
Corporation 224,642 4,245,903 $ 2,006 22,415
Warehouse and
manufacturing
buildings leased to
Gibson Greetings, Inc. 1,361,493 12,325,776 (3,929,972)
Warehouse and
manufacturing
building leased to
CSS Industries, 810,639 10,826,432 (3,295,231)
----------- ----------- ----------- ------------
Inc./Cleo, Inc. $ 2,939,658 $30,467,780 $ 2,006 $(7,259,270)
=========== =========== =========== ============
Life on which
Gross Amount at which Carried Depreciation
at Close of Period (c)(d) Statement of
------------------------------------------------ Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
------------ ------------ ------------- ---------------- ------------- -----------
Operating Method:
Dairy processing
facility leased to
Hughes Markets, Inc. $ 344,503 $ 1,625,424 $ 1,969,927 $ 1,166,647 June 1, 1993 5-36 years
Building leased to November 24,
Sports & Recreation, Inc. 218,352 1,581,648 1,800,000 250,427 1981 30 years
Centralized telephone
bureau leased to
Excel Commun- November 24,
ications, Inc. 692,644 2,255,944 2,948,588 162,293 1981 30 years
----------- ----------- ----------- ------------ ------------ ------------
$ 1,255,499 $ 5,463,016 $ 6,718,515 $ 1,579,367
=========== ============ ============ ============
Direct financing method:
Centralized telephone
bureau leased to
Western Union November 24,
Financial Services, Inc. $ 3,556,071 1981
Computer Center
leased to AT&T November 24,
Corporation 4,494,966 1981
Warehouse and
manufacturing
buildings leased to January 26,
Gibson Greetings, Inc. 9,757,297 1982
Warehouse and
manufacturing
building leased to January 26,
CSS Industries, 8,341,840 1982
------------
Inc./Cleo, Inc. $26,150,174
============
See accompanying notes to Schedule.
-17-
37
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
(a) Consists of acquisition costs including legal fees, appraisal
fees, title costs and other related professional fees, and the
purchase of additional land subsequent to purchase.
(b) The increase (decrease) in net investment is due to the
amortization of unearned income producing a constant periodic
rate of return on the net investment and does not include lease
payments received which at times may be greater or less than
such amortization and the writedowns to fair value of the
Moorestown, New Jersey and Reno, Nevada properties and
adjustments relating to deferred gains on lease restructurings.
(c) At December 31, 1997, the aggregate cost of real estate owned
for Federal income tax purposes is $42,473,706.
(d)
Reconciliation of Real Estate Accounted
---------------------------------------
for Under the Operating Method
------------------------------
December 31,
-------------------------------
1996 1997
---------- ----------
Balance at beginning of year $5,769,927 $6,073,370
Additions 303,443 645,145
---------- ----------
Balance at close of year $6,073,370 $6,718,515
========== ==========
Reconciliation of Accumulated Depreciation
------------------------------------------
for Under the Operating Method
------------------------------
December 31,
-------------------------------
1996 1997
---------- ----------
Balance at beginning of year $1,175,202 $1,364,095
Depreciation expense 188,893 215,272
---------- ----------
Balance at close of year $1,364,095 $1,579,367
========== ==========
-18-
38
PROPERTIES
LEASE TYPE OF OWNERSHIP
OBLIGOR TYPE OF PROPERTY LOCATION INTEREST
- ----------------- ---------------- -------- -----------------
GIBSON GREETINGS, Land and Manufac- Cincinnati, Ownership of a
INC. turing/Warehouse Ohio; and 71.5% interest
Buildings - 2 Berea, Kentucky in land and
locations buildings
CSS INDUSTRIES, Land and Manufacturing/ Memphis Ownership of a
INC./ CLEO, INC. Warehouse Buildings Tennessee 71.5% interest
in land and
buildings
WESTERN UNION Land and Bridgeton, Ownership of a
FINANCIAL SERVICES, Centralized Missouri 61% interest
INC. Telephone Bureau in land and
buildings
SPORTS & Land and Moorestown, Ownership of an
RECREATION, INC. Building New Jersey approximate 61%
interest in land
and building
EXCEL COMM- Land and Reno, Nevada Ownership of an
UNICATIONS, INC. Building approximate 61%
interest in land
and building
HUGHES MARKETS, Land and Dairy Pro- Los Angeles, Ownership of an
INC. cessing Facility California approximate
16.76% interest
in land and
building
AT&T CORPORATION Land and a Bridgeton, Ownership of an
Computer Center Missouri approximate 61%
interest in land
and building
-19-
39
MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED
UNITHOLDER MATTERS
As of December 31, 1997 there were 2,471 holders of record of
the Limited Partnership Units of the Partnership. On January 1, 1998, 2,427
holders of Limited Partnership Units exchanged such units for interests in Carey
Diversified LLC and 44 holders exchanged such units for Subsidiary Partnership
Units. There is no established public trading market for Subsidiary Partnership
Units.
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 1994:
Cash Distributions Per Unit
1995 1996 1997
------- ------ ------
First quarter $ 17.34 $12.19 $12.40
Second quarter 17.39 12.34 12.41
Third quarter 17.58 12.38 12.42
Fourth quarter 137.81 (a) 12.39 25.62(b)
------- ------ ------
$190.12 $49.30 $62.85
======= ====== ======
(a) Includes a special distribution of $120 per Unit.
(b) Includes distributions of $12.43 and $13.19 per Limited Partnership Unit
paid in October 1997 and December 1997, respectively.
On October 16, 1997, the Partnership began the solicitation of
consents from limited partners to approve the merger of the Partnership with all
of the CPA(R) Partnerships into Carey Diversified LLC, a Delaware limited
liability company. Limited Partners were offered the opportunity to vote to
approve or disapprove the merger and to choose either interests ("Listed
Shares") in the Carey Diversified LLC or interests ("Subsidiary Partnership
Units") in the partnership which survived the merger. The solicitation period
ended on December 16, 1997. The results of the voting were as follows:
Units Voted Units Voted Units Voted Units Not
Yes No Abstaining Voting
------ ----- ---------- ------
Merger of Partnership
with Carey Diversified 48,293 73.17% 1,891 2.87% 146 .22% 15,670 23.74%
Subsidiary
Listed Shares Partnership Units
------------- -----------------
Number of Units
Electing 64,878 1,122
-20-