UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number 0-10322
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CORPORATE PROPERTY ASSOCIATES 3
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2708080
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
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(Address of principal executive offices) (Zip Code)
(212) 492-1100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
INDEX
Page No.
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PART I
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Item 1. - Financial Information*
Balance Sheets, December 31, 1995 and
March 31, 1996 2
Statements of Income for the three
months ended March 31, 1995 and 1996 3
Statements of Cash Flows for the three
months ended March 31, 1995 and 1996 4
Notes to Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7
PART II
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Item 6. - Exhibits and Reports on Form 8-K 8
Signatures 9
*The summarized financial information contained herein is unaudited;
however in the opinion of management, all adjustments necessary for a fair
presentation of such financial information have been included.
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CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
PART I
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Item 1. - FINANCIAL INFORMATION
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BALANCE SHEETS
December 31, March 31
1995 1996
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(Note) (Unaudited)
ASSETS:
Land and buildings, net of
accumulated depreciation of
$1,175,202 at December 31, 1995 and
$1,222,609 at March 31, 1996 $ 4,594,725 $ 4,547,318
Net investment in direct
financing leases 25,291,792 25,383,995
Real estate held for sale 1,853,816
Cash and cash equivalents 1,158,302 1,557,326
Accrued interest and rents receivable 210,362 202,611
Other assets 114,160 104,224
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Total assets $33,223,157 $31,795,474
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LIABILITIES:
Note payable to affiliate $ 2,300,000 $ 800,000
Accounts payable and accrued expenses 86,776 70,723
Accounts payable to affiliates 57,298 78,910
Prepaid rental income
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Total liabilities 2,444,074 949,633
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PARTNERS' CAPITAL:
General Partners 191,606 193,746
Limited Partners (66,000 Limited
Partnership Units issued and
outstanding) 30,587,477 30,652,095
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Total partners' capital 30,779,083 30,845,841
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Total liabilities and
partners' capital $33,223,157 $31,795,474
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The accompanying notes are an integral part of the financial statements.
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
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CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31, 1995 March 31, 1996
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Revenues:
Interest income from direct financing leases $1,696,983 $1,176,722
Rental income from operating leases 71,945 76,261
Other interest income 6,662 23,635
Other income 47,997
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1,823,587 1,276,618
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Expenses:
Interest 382,376 38,835
Depreciation 50,124 47,407
General and administrative 115,500 86,144
Property expense 204,494 217,336
Amortization 5,601
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758,095 389,722
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Net income $1,065,492 $ 886,896
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Net income allocated
to General Partners $ 21,310 $ 17,738
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Net income allocated
to Limited Partners $ 1,044,182 $ 869,158
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Net income per Unit:
(66,000 Limited
Partnership Units) $15.82 $13.17
====== ======
The accompanying notes are an integral part of the financial statements.
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CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF CASH FLOWS (UNAUDITED)
March 31,
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1995 1996
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Cash flows from operating activities:
Net income $ 1,065,492 $ 886,896
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 55,725 47,407
Interest income on direct financing leases
in excess of (less than) scheduled rents 142 (92,203)
Net change in operating assets and liabilities (266,295) 23,246
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Net cash provided by operating activities 855,064 865,346
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Cash flows from investing activities:
Proceeds from sale of real estate 1,853,816
Payments received in connection with
exercise of purchase option 195,000
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Net cash provided by investing activities 195,000 1,853,816
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Cash flows from financing activities:
Distributions to partners (1,167,796) (820,138)
Partial prepayment of note payable to affiliate (1,500,000)
Prepayment of mortgae notes payable (1,320,347)
Payments on mortgage principal (348,024)
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Net cash used in financing activities (2,836,167) (2,320,138)
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Net (decrease) increase in cash and cash equivalents (1,786,103) 399,024
Cash and cash equivalents, beginning of period 8,851,419 1,158,302
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Cash and cash equivalents, end of period $ 7,065,316 $ 1,557,326
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Supplemental disclosure of cash flows information:
Interest paid $ 281,625 $ 55,644
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The accompanying notes are an integral part of the financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
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The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. For further information, refer to the
financial statements and footnotes thereto included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1995.
Note 2. Distributions to Partners:
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Distributions declared and paid to partners during the three months ended
March 31, 1996 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
- ---------------- ---------------- ---------------- ------------------------
December 31, 1995 $15,598 $804,540 $12.19
======= ======== ======
A distribution of $12.34 per Limited Partner Unit for the quarter ended March
31, 1996 was declared and paid in April 1996.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month periods ended March 31, 1995 and 1996, the Partnership
incurred management fees of $28,356 and $45,262, respectively, and general and
administrative expense reimbursements of $22,230 and $24,846, respectively.
The Partnership, in conjunction with certain affiliates, is a participant in a
cost sharing agreement for the purpose of renting and occupying office space.
Under the agreement, the Partnership pays its proportionate share of rent and
other costs of occupancy. Net expenses incurred for the three months ended
March 31, 1995 and 1996 were $35,169 and $24,613, respectively.
Note 4. Industry Segment Information:
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The Partnership's operations consist of the investment in and the leasing of
industrial and commercial real estate. For the three-month periods ended
March 31, 1995 and 1996, the Partnership earned its total operating revenues
(rental income plus interest income from financing leases) from the following
lease obligors:
1995 % 1996 %
---------- -------- ---------- ----
Gibson Greetings, Inc. $1,490,522 84% $ 636,133 51%
Cleo, Inc. 334,145 27
AT&T 114,527 7 114,651 9
New Valley Corporation 91,934 5 91,793 7
Hughes Markets, Inc. 71,945 4 76,261 6
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$1,768,928 100% $1,252,983 100%
========== ======= ========== ===
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CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Sale of Real Estate:
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On January 10, 1996, the Partnership sold its warehouse property in Wilkes-
Barre, Pennsylvania, formerly leased to The Leslie Fay Company ("Leslie Fay"),
for $2,000,000. Net of the costs of selling the property, the Partnership
received cash proceeds of $1,853,816. No gain or loss was recognized on the
sale as the carrying value of the property was adjusted to an amount equal to
the net sales proceeds as of December 31, 1995.
The Partnership purchased the property in 1982 for $9,400,000 and entered into
a long-term net lease with Leslie Fay. In 1992, Leslie Fay executed its
option to purchase the property for the greater of fair market value as
impacted by the lease or $9,400,000, the Partnership's purchase cost for the
property. From 1992 to 1995, the Partnership and Leslie Fay were engaged in
litigation regarding the sales price of the property. In 1995, Leslie Fay and
the Partnership resolved the dispute and entered into a settlement. Pursuant
to the settlement, the Partnership retained ownership of the property, and
Leslie Fay subsequently vacated the property in September 1995, at which time
the Company entered into negotiations to sell the property to an unaffiliated
third party. Total proceeds from the settlement which were collected in a
series of payments during the litigation period amounted to $18,665,601. In
addition, the Partnership has a bankruptcy claim of $2,650,000 against Leslie
Fay as an unsecured creditor. The Partnership may not realize the full amount
of the bankruptcy claim.
Note 6. Property Leased to Hughes Markets, Inc.:
---------------------------------------
The Partnership and Corporate Property Associates 4 ("CPA(R):4"), an
affiliate, own a dairy processing facility in Los Angeles, California as
tenants-in-common with 16.76% and 83.24% ownership interests, respectively.
On May 1, 1996, the Partnership and CPA(R):4 entered into a lease amendment
agreement with the lessee, Hughes Markets, Inc. ("Hughes"), to extend the
lease term from April 30, 1996 to April 30, 1998. Under the extension
agreement, monthly rent will increase to $336,166 (of which the Partnership's
share will be $56,337) from $151,686 (of which the Partnership's share was
$25,420). At the end of the two-year period, Hughes will make a lump sum
payment of $3,500,000 (of which the Partnership's share will be approximately
$587,000). Hughes is obligated to provide the Partnership and CPA(R):4 a
letter of credit, cash deposit or other form of security acceptable at the
Partnership and CPA(R):4's sole discretion to ensure payment of the
$3,500,000. Hughes may extend the lease on a month-to-month basis for up to
six months at a rental of $500,000 per month.
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CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
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Results of Operations:
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The results of operations for the three-month period ended March 31, 1996
reflected a 17% decrease in net income as compared with the results for the
three-month period ended March 31, 1995. Approximately 4% of the decrease was
due to an item of nonrecurring other income recorded in the first quarter of
1995. The remaining decrease in earnings was due to a decrease in lease
revenues which resulted solely from the November 1995 lease restructuring on
the master lease with Gibson Greetings, Inc. ("Gibson") in November 1995,
which included severing one property from the Gibson lease and entering into a
new lease with Cleo, Inc. ("Cleo"). Pursuant to the lease restructuring, the
mortgage loan on the Gibson properties was paid off using proceeds from a lump
sum payment made by Gibson in 1995; annual lease rentals on the Gibson and
Cleo leases were reduced by an amount approximating the annual debt service on
the retired loan. In addition, lease terms were extended beyond the original
expiration date. Net cash flow from the restructured leases has increased
although net income decreased due to the reduction of rents associated with
the principal amortization component of the debt service on the retired loan.
As more fully described in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1995, Management believes that the restructuring
has significantly reduced the concentration of risk associated with the Gibson
lease as its share of total lease revenues has decreased from 84% to 51%. The
decrease in revenues was partially offset by a significant decrease in
interest expense. During 1995, the Partnership paid off all of its mortgage
debt including the mortgage loan on the Gibson properties. Interest expense
is expected to decrease further as the Partnership continues to reduce the
outstanding balance on its note payable to an affiliate. In spite of the
reduction in revenues and net income, cash flow from operations increased
modestly.
The Partnership's lease with Hughes Markets, Inc. ("Hughes") for the dairy
processing plant in Los Angeles, California has been extended through April
30, 1998. Annual cash flow will increase by $371,000 during this extension
term. In addition, the Partnership will receive a lump sum payment of
$587,000 at the end of the two-year period. Rentals and cash flow will also
benefit from the commencement in July 1996 of monthly rental payments of
$15,600 on the Partnership's lease with Sports & Recreation, Inc. for its
property in Moorestown, New Jersey.
Financial Condition:
-------------------
There has been no material change in the Partnership's financial condition
since December 31, 1995. During the period, the Partnership sold its property
in Wilkes-Barre, Pennsylvania and used the proceeds of $1,854,000 to reduce
the outstanding balance on its note payable to an affiliate to $800,000. Cash
flow from operations of $865,000 was sufficient to fund distributions to
partners of $820,000. With the extension of the Hughes lease, the Partnership
should be able to generate sufficient cash flow to retire the note payable in
the ordinary course of business while increasing the rate of distributions to
partners. As the property can be adapted for other purposes, Management
believes that it would be successful in remarketing the property within a
reasonable period after Hughes vacates the property.
-7-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
PART II
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Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
None
(b) Reports on Form 8-K
During the quarter ended March 31, 1996, the Partnership was not
required to file any reports on form 8-K.
-8-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
By: W.P. CAREY & CO., INC.
05/09/96 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
05/09/96 By: /s/ Michael D. Roberts
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Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
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