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 JUNE 30, 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
June 30, 1996 2
Statements of Income for the three and six
months ended June 30, 1995 and 1996 3
Statements of Cash Flows for the six
months ended June 30, 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, June 30,
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
$1,270,016 at March 31, 1996 $ 4,594,725 $ 4,499,911
Net investment in direct
financing leases 25,291,792 25,481,351
Real estate held for sale 1,853,816
Cash and cash equivalents 1,158,302 1,281,119
Accrued interest and rents receivable 210,362 205,112
Other assets 114,160 309,327
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Total assets $33,223,157 $31,776,820
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LIABILITIES:
Note payable to affiliate $ 2,300,000 $ 500,000
Accounts payable and accrued expenses 86,776 46,367
Accounts payable to affiliates 57,298 102,300
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Total liabilities 2,444,074 648,667
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PARTNERS' CAPITAL:
General Partners 191,606 199,568
Limited Partners (66,000 Limited
Partnership Units issued and
outstanding) 30,587,477 30,928,585
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Total partners' capital 30,779,083 31,128,153
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Total liabilities and
partners' capital $33,223,157 $31,776,820
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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 Six Months Ended
June 30, 1995 June 30, 1996 June 30, 1995 June 30, 1996
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Revenues:
Interest from direct
financing leases $1,696,969 $1,181,875 $3,393,952 $2,358,597
Rental income from
operating leases 71,944 186,987 143,889 263,248
Other interest income 57,540 15,906 64,202 39,541
Other income 47,997
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1,826,453 1,384,768 3,650,040 2,661,386
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Expenses:
Interest 344,225 15,239 726,601 54,074
Depreciation 50,124 47,407 100,248 94,814
General and administrative 73,601 82,603 189,101 168,747
Property expense 314,699 126,325 519,193 343,661
Amortization 5,602 11,203
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788,251 271,574 1,546,346 661,296
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Net income $1,038,202 $1,113,194 $2,103,694 $2,000,090
========== ========== ========== ==========
Net income allocated
to General Partners $ 20,764 $ 22,264 $ 42,074 $ 40,002
========== ========== ========== ==========
Net income allocated
to Limited Partners $1,017,438 $1,090,930 $2,061,620 $1,960,088
========== ========== ========== ==========
Net income per Unit
(66,000 Limited
Partnership Units) $15.42 $16.53 $31.24 $29.70
====== ====== ====== ======
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)
Six Months Ended
June 30,
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1995 1996
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Cash flows from operating activities:
Net income $ 2,103,694 $ 2,000,090
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 111,451 94,814
Amortization of unearned income on direct
financing leases in excess of scheduled rents 298 (140,676)
Scheduled rents on operating leases less than
straight-line adjustments (48,883)
Net change in operating assets and liabilities (210,257) (185,324)
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Net cash provided by operating activities 2,005,186 1,720,021
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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 390,001
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Net cash provided by investing activities 390,001 1,853,816
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Cash flows from financing activities:
Distributions to partners (2,338,959) (1,651,020)
Partial prepayment of note payable to affiliate (1,800,000)
Payments on mortgage principal (629,060)
Prepayment on mortgage notes payable (1,320,347)
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Net cash used in financing activities (4,288,366) (3,451,020)
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Net (decrease) increase in cash and cash equivalents (1,893,179) 122,817
Cash and cash equivalents, beginning of period 8,851,419 1,158,302
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Cash and cash equivalents, end of period $ 6,958,240 $ 1,281,119
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Supplemental disclosure of cash flows information:
Interest paid $ 741,153 $ 75,604
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The accompanying notes are an integral part of the financial statements.
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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 six months ended June
30, 1996 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
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December 31, 1995 $15,598 $804,540 $12.19
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March 31, 1996 $16,442 $814,440 $12.34
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A distribution of $12.38 per Limited Partner Unit for the quarter ended June
30, 1996 was declared and paid in July 1996.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month and six-month periods ended June 30, 1995 the Partnership
incurred management fees of $51,767 and $80,123, respectively, and general and
administrative expense reimbursements of $23,255 and $45,485, respectively.
For the three-month and six-month periods ended June 30, 1996, the Partnership
incurred management fees of $70,070 and $115,332, respectively, and general
and administrative expense reimbursements of $16,048 and $40,894,
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 six months ended June
30, 1995 and 1996 were $51,825 and $39,726, 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 six-month periods ended June
30, 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 %
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Gibson Greetings, Inc. $2,981,045 84% $1,275,373 49%
Cleo, Inc. 670,340 25
Hughes Markets, Inc. 143,889 4 263,248 10
AT&T 229,072 7 229,335 9
New Valley Corporation 183,835 5 183,549 7
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$3,537,841 100% $2,621,845 100%
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CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. 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 which initial term had expired on April 30, 1996 to April 30, 1998.
Under the extension agreement, Hughes' monthly rent increased to $336,166 (of
which the Partnership's share is $56,337) from $151,686 (of which the
Partnership's share was $25,420). At the end of the two-year period, Hughes
is obligated to pay a lump sum rental payment of $3,500,000 (of which the
Partnership's share will be approximately $587,000). Hughes has an option to
extend the lease on a month-to-month basis for up to six months at a rental of
$500,000 per month.
In accordance with the lease amendment agreement, Hughes has provided the
Partnership and CPA(R):4 an irrevocable letter of credit of $3,500,000, an
amount equal to Hughes' lump sum payment obligation. For financial reporting
purposes, the $3,500,000 rental payable at the end of the lease term is being
recognized on a straight-line basis over the term of the lease extension
period.
Note 6. Property in Moorestown, New Jersey:
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On April 7, 1995, the Partnership and Corporate Property Associates 2
(CPA(R):2), an affiliate, which own a property in Moorestown, New Jersey, as
tenants-in-common with ownership interests of 61% and 39%, respectively,
entered into a net lease for the Moorestown property with Sports & Recreation,
Inc. ("Sports & Recreation"). The lease provided for an initial term of 16
years with an initial annual rent of $308,750 (of which the Partnership's
share would be $187,750). The lease provided for a feasibility period through
December 31, 1995 with an option for Sports & Recreation to terminate the
lease on or before the expiration of such feasibility period. Sports &
Recreation did not exercise its option and, in January 1996, commenced
construction to convert the facility into a retail store (with the Partnership
and CPA(R):2 having an obligation to reimburse Sports & Recreation for certain
construction costs).
Sports & Recreation was scheduled to make its first monthly rental payment on
July 1, 1996; however, no rental payment was received. On July 2, 1996,
Sports & Recreation notified the Partnership and CPA(R):2 that it intended to
terminate the lease, offering $300,000 as a settlement in exchange for being
released from its lease obligations. The Partnership and CPA(R):2 rejected
this offer as inadequate and made a counter-offer to Sports & Recreation as to
the amount that they would accept in order to release Sports & Recreation from
its obligations. In addition, the Partnership and CPA(R):2 have declared the
lease in default and intend to seek various remedies available under the
lease. As a result of this dispute and the nonpayment of rent by Sports &
Recreation, the Partnership has not recognized any rental income from the
Sports & Recreation lease in the accompanying financial statements.
Note 7. Property in Reno, Nevada:
------------------------
The Partnership and CPA(R):2 own a property in Reno, Nevada as tenants-in-
common with 61% and 39% interests, respectively. In December 1994, the United
States Bankruptcy Court approved the termination of New Valley Corporation's
("New Valley") lease for the property at which time New Valley vacated the
property.
The Partnership and CPA(R):2 are in the process of finalizing a net lease
agreement with Excel Telecommunications, Inc. ("Excel") for the Reno property.
The lease is expected to provide for an initial term of ten years followed by
lessee options for two five-year renewal terms. Annual rent during the first
five lease years is expected to be $532,800 (of which the Partnership's share
would be $325,000) increasing to $580,800 (of which the Partnership's share
would be $354,000), thereafter. Excel will have the right to terminate the
lease at the end of the sixth lease year.
The Partnership and CPA(R):2 are committed to provide Excel with an allowance
of up to approximately $1,400,000 (of which the Partnership's share would be
$854,000) which would allow Excel to retrofit the facility to its
specifications. The Partnership and CPA(R):2 will be obligated to maintain
and repair the roof; however, if the roof is replaced, Excel will assume the
maintenance and repair obligation subsequent to any roof replacement.
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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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Net income for the three-month period ended June 30, 1996 increased by
$75,000 while net income decreased by $104,000 for the six-month period ended
June 30, 1996 as compared with the similar periods ended June 30, 1995. The
increase in net income for the comparable three-month period was due to
decreases in interest and property expenses and were partially offset by a
decrease in lease revenues. The decrease in interest expense was due to the
satisfaction of all the Partnership's outstanding mortgage loans during 1995
and the decrease in the balance of a note payable obligation to an affiliate
from $2,300,000 at December 31, 1995 to $500,000. The decrease in property
expenses was due to the costs incurred in 1995 in connection with the
Partnership's dispute with the Leslie Fay Company which was successfully
resolved in August 1995. The decrease in lease revenues resulted solely from
the November 1995 lease restructuring of the master lease with Gibson
Greetings, Inc. ("Gibson") which included severing one property from the
Gibson master lease and entering into a new lease with Cleo, Inc. ("Cleo").
As more fully described in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1995, Management believes that significant
benefits were achieved as the mortgage debt on the three properties was
retired, the concentration of risk associated with Gibson's 84% share of the
Partnership's lease revenues was reduced to 49% and the initial terms of the
Gibson and Cleo leases were extended beyond the original expiration of 2002.
Lease revenues during the three-month period reflect the benefit of the lease
amendment agreement, effective May 1, 1996, negotiated with Hughes Markets,
Inc. ("Hughes"). As a result of the agreement, the Hughes lease was renewed
for a two-year term at a significantly higher monthly rental as well as a lump
sum payment to be received in 1998. Annual cash flow from the Hughes lease
will increase by $371,000 during the extension term in addition to the lump
sum payment of $587,000. The decrease in net income for the comparable six-
month periods was due, in part, to $48,000 of nonrecurring other income in
1995 (which did not impact the comparable three-month periods). The slight
decrease in income, excluding the effect of the nonrecurring other income was
due to the aforementioned decrease in lease revenues and offset by decreases
in interest expense and property expenses; however, the effects of the
decrease in interest on the note payable to affiliate and the increase in rent
from the Hughes lease amendment were not as significant for the full six-month
period as for the three-month period.
Financial Condition:
-------------------
There has been no material change in the Partnership's financial
condition since December 31, 1995. Cash flow from operations of $1,720,000
was sufficient to fund distributions to partners of $1,651,000. During the
first quarter, the Partnership sold its property in Wilkes-Barre, Pennsylvania
and realized proceeds of $1,854,000. The Partnership also reduced its note
obligation to an affiliate by $1,800,000 to $500,000. Based on projections of
cash flow from operations, Management believes that the remaining balance of
this note payable can be paid off in the ordinary course of business. Such
projection includes the increased cash flow from the Hughes property. As all
of the Partnership's properties are unleveraged, the Partnership has
significant borrowing capacity and, if necessary, can use such capacity to
fund its commitment of up to $854,000 to retrofit its Reno, Nevada property
which is to be occupied by Excel Telecommunications, Inc. ("Excel"). A lease
with Excel is in the process of being finalized.
The Partnership is currently pursuing its remedies against Sports &
Recreation, Inc. ("Sports & Recreation") due to Sports & Recreation's default
under its lease for a property in Moorestown, New Jersey. Although Sports &
Recreation has offered a cash settlement to terminate the lease, the
Partnership has rejected such offer as inadequate and has proposed a counter-
offer to Sports & Recreation. There is no assurance that this dispute will be
resolved soon.
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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 June 30, 1996, the Partnership was not
required to file any reports on form 8-K.
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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.
8/8/96 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
8/8/96 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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