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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, 1995
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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 Identification No.)
incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
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(Address of principal executive offices) (Zip Code)
(212) 492-1100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [_] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[_] Yes [_] No
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
INDEX
Page No.
--------
PART I
------
Item 1. - Financial Information*
Balance Sheets, December 31, 1994 and
June 30, 1995 2
Statements of Income for the three and six
months ended June 30, 1994 and 1995 3
Statements of Cash Flows for the six
months ended June 30, 1994 and 1995 4
Notes to Financial Statements 5-7
Item 2. - Management's Discussion of Operations 8-9
PART II
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Item 6. - Exhibits and Reports on Form 8-K 10
Signatures 11
*The summarized financial information contained herein is unaudited; however in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
-1-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
PART I
------
Item 1. - FINANCIAL INFORMATION
-------------------------------
BALANCE SHEETS
December 31, June 30,
1994 1995
------------ ----------
(Note) (Unaudited)
ASSETS:
Land and buildings, net of
accumulated depreciation of
$976,612 at December 31, 1994 and
$1,076,860 at June 30, 1995 $ 4,793,315 $ 4,693,067
Net investment in direct
financing leases 33,415,760 33,415,462
Real estate held for sale 9,400,000 9,400,000
Cash and cash equivalents 8,851,419 6,958,240
Accrued interest and rents receivable 524,060 542,038
Other assets 64,971 143,403
----------- -----------
Total assets $57,049,525 $55,152,210
=========== ===========
LIABILITIES:
Mortgage notes payable $15,624,196 $13,674,789
Accrued interest payable 351,372 496,662
Accounts payable and accrued expenses 428,778 157,877
Accounts payable to affiliates 61,662
Prepaid rental income 38,695
Purchase installments 13,080,601 13,470,602
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Total liabilities 29,523,642 27,861,592
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PARTNERS' CAPITAL:
General Partners 46,541 41,836
Limited Partners (66,000 Limited
Partnership Units issued and
outstanding) 27,479,342 27,248,782
----------- -----------
Total partners' capital 27,525,883 27,290,618
----------- -----------
Total liabilities and
partners' capital $57,049,525 $55,152,210
=========== ===========
The accompanying notes are an integral part of the financial statements.
Note: The balance sheet at December 31, 1994 has been derived from the audited
financial statements at that date.
-2-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
June 30, 1994 June 30, 1995 June 30, 1994 June 30, 1995
------------- ------------- ------------- -------------
Revenues:
Interest income from
direct financing leases $1,763,953 $1,696,969 $3,527,959 $3,393,952
Rental income from
operating leases 71,944 71,944 143,889 143,889
Other interest income 13,435 57,540 28,588 64,202
Other income 47,997
---------- ---------- ---------- ----------
1,849,332 1,826,453 3,700,436 3,650,040
---------- ---------- ---------- ----------
Expenses:
Interest on mortgages 404,978 344,225 818,417 726,601
Depreciation 39,729 50,124 79,459 100,248
General and administrative 76,922 73,601 153,801 189,101
Property expense 450,288 314,699 605,253 519,193
Amortization 5,602 5,602 11,203 11,203
---------- ---------- ---------- ----------
977,519 788,251 1,668,133 1,546,346
---------- ---------- ---------- ----------
Net income $ 871,813 $1,038,202 $2,032,303 $2,103,694
========== ========== ========== ==========
Net income allocated
to General Partners $ 17,436 $ 20,764 $ 40,646 $ 42,074
========== ========== ========== ==========
Net income allocated
to Limited Partners $ 854,377 $1,017,438 $1,991,657 $2,061,620
========== ========== ========== ==========
Net income per Unit
(66,000 Limited
Partnership Units) $12.95 $15.42 $30.18 $31.24
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
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1994 1995
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Cash flows from operating activities:
Net income $ 2,032,303 $ 2,103,694
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90,662 111,451
Other noncash items 4,411 298
Net change in operating assets and liabilities 147,796 (210,257)
----------- ------------
Net cash provided by operating activities 2,275,172 2,005,186
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Cash flows from investing activities:
Payments received in connection with
exercise of purchase option 1,143,098 390,001
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Net cash provided by investing activities 1,143,098 390,001
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Cash flows from financing activities:
Distributions to partners (2,326,837) (2,338,959)
Prepayment of mortgage notes payable (1,320,347)
Payments on mortgage principal (709,506) (629,060)
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Net cash used by financing activities (3,036,343) (4,288,366)
----------- ------------
Net increase (decrease) in cash and
cash equivalents 381,927 (1,893,179)
Cash and cash equivalents, beginning of period 8,027,612 8,851,419
----------- ------------
Cash and cash equivalents, end of period $ 8,409,539 $ 6,958,240
=========== ============
Supplemental disclosure of cash flows
information:
Interest paid $ 824,034 $ 741,153
=========== ============
The accompanying notes are an integral part of the financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. For further information, refer to the
financial statements and footnotes thereto included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1994.
Note 2. Distributions to Partners:
-------------------------
Distributions declared and paid to partners during the six months ended June
30, 1995 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
------------- ---------------- ---------------- ------------------------
December 31, 1994 $23,356 $1,144,440 $17.34
======= ========== ======
March 31, 1995 $23,423 $1,147,740 $17.39
======= ========== ======
A distribution of $17.58 per Limited Partner Unit for the quarter ended June
30, 1995 was declared and paid in July 1995.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month and six-month periods ended June 30, 1994, the Partnership
incurred management fees of $39,193 and $91,640, respectively, and general and
administrative expense reimbursements of $21,455 and $43,437, respectively.
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.
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, 1994 and 1995 were $27,151 and $51,825, respectively.
Note 4. Industry Segment Information:
----------------------------
The Partnership's operations consist of the investment in and the leasing of
industrial and commercial real estate. For the six-month periods ended June
30, 1994 and 1995, the Partnership earned its total operating revenues (rental
income plus interest income from financing leases) from the following lease
obligors:
1994 % 1995 %
---------- ---- ---------- ----
Gibson Greetings, Inc. $2,981,045 81% $2,981,045 84%
AT&T Corporation 228,853 6 229,072 7
New Valley Corporation 318,061 9 183,835 5
Hughes Markets, Inc. 143,889 4 143,889 4
---------- --- ---------- ---
$3,671,848 100% $3,537,841 100%
========== === ========== ===
-5-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. 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 the Moorestown, New Jersey property as
tenants-in-common, entered into a net lease for the property with Sports &
Recreation, Inc. ("Sports & Recreation") which intends to convert the facility
into a retail store.
The lease provides for a feasibility period through September 30, 1995 which
is extendable through December 31, 1995 followed by an initial term of 16
years. If, during the feasibility period, Sports & Recreation is unable to
meet conditions necessary to retrofit the facility to its specifications or
obtain certain approvals from the municipal authorities, it has the right to
terminate the lease. During the feasibility period, the Partnership and
CPA(R):2 will reimburse Sports & Recreation for certain planning costs up to a
maximum of $24,000. Sports & Recreation will incur all costs of retrofitting
the facility; however, the Partnership and CPA(R):2 will reimburse Sports &
Recreation for the cost of replacing the HVAC system and installing a new roof
and drainage system.
During the 16 year lease term, which is scheduled to commence at the end of
the feasibility period, annual rentals will initially be $308,750 (of which
the Partnership's share is approximately $187,750) during the first five lease
years with stated increases every five years thereafter. Sports & Recreation
has not yet indicated whether it will extend the lease beyond the feasibility
period and there is no assurance that Sports & Recreation will lease the
property after the feasibility period.
Note 6. The Leslie Fay Company:
----------------------
During 1991, The Leslie Fay Company ("Leslie Fay") informed the Partnership
that it was exercising an option to purchase its leased property from the
Partnership as of April 30, 1992. Under the lease's purchase option, Leslie
Fay's purchase exercise price was to be the greater of $9,400,000, the
Partnership's purchase price for the property in 1982, or the fair market
value of the property as impacted by the lease as of the option exercise date.
The process of determining the fair market value was underway when Leslie Fay
filed suit to ask the court to intervene in order to determine the contractual
interpretation of fair value. The court ruled in favor of the Partnership and
the ruling was upheld on appeal by the Pennsylvania Superior and Supreme
Courts. Leslie Fay also filed a second lawsuit seeking to transfer the
property and other benefits of ownership. In connection with this second
suit, the court ordered Leslie Fay to pay $7,200,000 to the Partnership as
partial payment for the purchase of the Leslie Fay property, post a surety
bond for $15,000,000 and to continue making its monthly payments of $190,516
to the Partnership, for application of such payments to the ultimate purchase
price. For financial reporting purposes, the $7,200,000 payment and all
subsequent monthly payments have been recorded as installment payments. In
addition, Leslie Fay would be entitled to interest on its monthly installments
and the Partnership would be entitled to interest on the difference between
the ultimate purchase price and the initial deposit of $7,200,000 upon
resolution of the second suit.
On April 5, 1993, Leslie Fay filed a voluntary petition under Chapter 11 of
the United Bankruptcy Code and continued to make monthly payment to the
Partnership for the period subsequent to the filing of the petition; however,
Leslie Fay and the Partnership agreed, effective January 1, 1995, to reduce
the monthly payment to $65,000. Since the filing of the voluntary petition,
Leslie Fay and the Partnership have made a series of claims and counterclaims;
however, Leslie Fay, the Partnership, the surety company and the Official
Committee of Unsecured Creditors of Leslie Fay signed and entered into a
compromise and settlement agreement in July 1995 which has been presented to
the bankruptcy court for its approval on August 7, 1995. The bankruptcy court
has not yet made a ruling on the compromise and settlement agreement. Upon
receiving approval of the compromise and settlement agreement, Leslie Fay will
be obligated to obtain dismissal with prejudice of all of its lawsuits filed
against the Partnership.
-6-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Under the compromise and settlement agreement, the surety company would pay the
Partnership $5,250,000 plus interest at the prime rate from April 15, 1995
through the date of payment, from which the Partnership would make a lump sum
payment to Leslie Fay of $250,000. The Partnership's bankruptcy claim against
Leslie Fay would be reduced to $2,650,000 and allowed as an unsecured creditor's
claim. There can be no assurance as to what the ultimate value of the unsecured
claim will be. In addition, the Partnership will keep the aggregate installment
payments from Leslie Fay of $13,470,601 as of June 30, 1995, all net interest
due to Leslie Fay on the installment payments which aggregates $382,706 would be
waived and the Partnership would retain ownership of the property with Leslie
Fay continuing to pay $65,000 per month until the later of September 30, 1995 or
when it surrenders and vacates the property.
The affiliate which manages the Partnership has excluded all payments from
Leslie Fay since April 30, 1992 from the management fee as all installments were
initially intended to be applied to the Leslie Fay purchase price and,
therefore, not subject to the management fee. The affiliate, pursuant to the
Amended Agreement of Partnership, would be entitled to management fees on all
monthly installment amounts collected to the extent such funds no longer apply
to the sale of the property. Such additional management fee would aggregate
approximately $314,000 but would be reduced by the application of any additional
expenses incurred by the Partnership in connection with the execution of the
compromise and settlement agreement. In the event that the agreement is
approved, the Partnership intends to hold the property for sale and would
reevaluate the property's residual value as the current value is based on the
minimum sales price pursuant to the original purchase option rather than local
market values. There is no assurance that the bankruptcy court will approve the
agreement. In the event the bankruptcy court does not approve the compromise and
settlement agreement, the four parties to the agreement would need to pursue an
alternative resolution. The Partnership is also considering seeking additional
litigation remedies from the title insurer which insured title to the Leslie Fay
property.
-7-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Results of Operations:
----------------------
Net income increased by $166,000 and $71,000 for the three-month and six-
month periods ended June 30, 1995, respectively, as compared with the three-
month and six-month periods ended June 30, 1994. The results for the six-month
period ended June 30, 1995 benefitted from a $48,000 nonrecurring item resulting
from an allowance negotiated for an account payable which had been accrued for
the full amount at December 31, 1994. The increase for the three-month period
ended June 30, 1995 was due to a decrease in interest and property expenses and
an increase in other interest income. These items were partially offset by a
decrease in lease revenues. The decrease in interest expense was due to the
payoff of $1,320,000 of mortgage debt in the first fiscal quarter and declining
mortgage balance of the Partnership's remaining nonrecourse mortgage obligation.
Property expense declined due to higher costs incurred in 1994 in connection
with the assessment of liquidity alternatives, however, the Partnership incurred
higher costs for the current period in connection with reaching a possible
resolution of the Partnership's dispute with The Leslie Fay Company ("Leslie
Fay") and for carrying costs for an unleased property in Reno, Nevada. Other
interest income increased due to higher rates on short-term money market
instruments; however, such rates have since moderated. The decrease in lease
revenue is due to the termination of the Partnership's lease with New Valley
Corporation ("New Valley") in December 1994 for the Reno property.
Net of the effect of the nonrecurring amounts, net income for the six-month
period ended December 31, 1995 would have reflected an increase of $23,000 over
the six-month period ended June 30, 1994. The Partnership benefitted from the
same items as described above; however, their effect was more pronounced on the
fiscal quarter ended June 30, 1995 than on the six-month period ended as of that
date. The six-month results were also impacted by the loss of lease revenue from
the Reno property and an increase in general and administrative costs due to
higher occupancy charges on the rent cost sharing agreement in the first quarter
of 1995.
Financial Condition:
--------------------
There has been no material change in the Partnership's financial condition
since December 31, 1994 and Management believes that the current cash balance of
$6,958,000 and cash provided from operating and investing activities will be
sufficient to pay distributions to partners and meet principal payment
installment obligations on the Partnership's remaining nonrecourse mortgage loan
collateralized by three properties leased to Gibson Greetings, Inc. ("Gibson").
For the six-month period ended June 30, 1995, cash flows from operating and
financing activities were sufficient to fund quarterly distributions to
partners. During the first quarter, the Partnership satisfied its obligations on
three mortgage loans by using approximately $1,320,000 of its cash reserves to
prepay three loans. Management determined it was prudent to reduce cash balances
to pay off debt which incurred higher rates of interest than the rate of
interest that could be earned by investing cash in money market instruments.
As more fully described in Note 6 to the Financial Statements, the
Partnership, subject to the approval of the bankruptcy court and certain other
conditions, will receive a substantial settlement from Leslie Fay and will hold
the Leslie Fay property as available for sale after Leslie Fay surrenders the
property to the Partnership. Although there can be no assurance that the
settlement will be approved, the Partnership will net approximately $4,685,000
after expenses on the payment from a surety bond. In addition, as a result of
the terminations of the New Valley leases for the Reno and Moorestown
properties in December 1994 and May 1993, respectively, pursuant to New
-8-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
----------------------------------------------------------
Financial Condition, continued:
-------------------------------
Valley's petition of voluntary bankruptcy, the Partnership anticipates that it
will receive a payment of its claim against New Valley; however, the amount of
such payment by New Valley to the Partnership has not yet been determined,
even though New Valley's reorganization has been approved by the bankruptcy
court.
To the extent that Sports & Recreation, Inc. is able to meet the conditions
necessary to retrofit the Moorestown property for use as a retail store, the
Partnership will be committed to pay its share of costs for rehabilitation of
the roof and heating, ventilation and air conditioning systems. Although such
costs are still in the process of being determined, Management believes that
such costs can be funded from existing cash reserves, if necessary. As the
Moorestown property is unencumbered by mortgage debt, the Partnership would have
the option of using debt financing to fund improvements; however, the
Partnership does not currently intend to pursue any additional debt financing.
The Partnership is in the process of remarketing the Hughes Market, Inc.
("Hughes") property which lease expires in 1996. The Partnership is in the
discussion stage with a potential long-term tenant and has also entered into
preliminary discussions with Hughes regarding a short-term extension. Lease
revenue from Gibson represents 84% of the Partnership lease revenues.
Accordingly, any adverse changes in Gibson's financial condition may
significantly affect the Partnership's future operating cash flow. Gibson has
publicly announced that it will consider being acquired by another company;
however, the Partnership is not a party to any discussions nor has it had any
communications with Gibson in regard to that matter. It is currently expected
that Gibson will meet all of its obligations under its lease which initial
term expires in 2002.
-9-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
PART II
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Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K
During the quarter ended June 30, 1995, the Partnership was not
required to file any reports on Form 8-K.
-10-
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
By: W.P. CAREY & CO., INC.
08/9/95 By: /s/ Claude Fernandez
------------- ------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
08/9/95 By: /s/ Michael D. Roberts
----------- -------------------------------
Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
-11-