<PAGE>
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 September 30, 1996
--------------------------------------------------
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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2708080
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 492-1100
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[_] Yes [_] No
<PAGE>
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
INDEX
Page No.
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PART I
------
Item 1. - Financial Information*
Balance Sheets, December 31, 1995 and
September 30, 1996 2
Statements of Income for the three and nine
months ended September 30, 1995 and 1996 3
Statements of Cash Flows for the nine
months ended September 30, 1995 and 1996 4
Notes to Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7
PART II
-------
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.
-1-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
PART I
------
Item 1. - FINANCIAL INFORMATION
-------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------- --------------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land and buildings, net of
accumulated depreciation of
$1,175,202 at December 31, 1995 and
$1,317,424 at September 30, 1996 $ 4,594,725 $ 4,452,503
Net investment in direct
financing leases 25,291,792 25,584,163
Real estate held for sale 1,853,816
Cash and cash equivalents 1,158,302 1,619,726
Accrued interest and rents receivable 210,362 235,072
Other assets 114,160 264,938
----------- -----------
Total assets $33,223,157 $32,156,402
=========== ===========
LIABILITIES:
Note payable to affiliate $ 2,300,000 $ 500,000
Accounts payable and accrued expenses 86,776 53,675
Accounts payable to affiliates 57,298 74,733
----------- -----------
Total liabilities 2,444,074 628,408
----------- -----------
PARTNERS' CAPITAL:
General Partners 191,606 207,565
Limited Partners (66,000 Limited
Partnership Units issued and
outstanding) 30,587,477 31,320,429
----------- -----------
Total partners' capital 30,779,083 31,527,994
----------- -----------
Total liabilities and
partners' capital $33,223,157 $32,156,402
=========== ===========
</TABLE>
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.
-2-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
30, 1995 30, 1996 30, 1995 30, 1996
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Interest from direct
financing leases $ 1,696,972 $ 1,187,332 $ 5,090,924 $3,545,929
Rental income from
operating leases 71,945 289,263 215,834 552,511
Other interest income 124,200 16,969 188,402 56,510
Other income 75,000 47,997 75,000
----------- ----------- ----------- ----------
1,893,117 1,568,564 5,543,157 4,229,950
----------- ----------- ----------- ----------
Expenses:
Interest 337,081 10,542 1,063,682 64,616
Depreciation 50,124 47,408 150,372 142,222
General and
administrative 95,340 72,994 284,441 241,741
Property expense 164,323 204,024 683,516 547,685
Amortization 5,601 16,804
----------- ----------- ----------- ----------
652,469 334,968 2,198,815 996,264
----------- ----------- ----------- ----------
Income before gain
on settlement 1,240,648 1,233,596 3,344,342 3,233,686
Gain on settlement 11,499,176 11,499,176
----------- ----------- ----------- ----------
Net income $12,739,824 $ 1,233,596 $14,843,518 $3,233,686
=========== =========== =========== ==========
Net income allocated
to General Partners $ 254,796 $ 24,672 $ 296,870 $ 64,674
=========== =========== =========== ==========
Net income allocated
to Limited Partners $12,485,028 $ 1,208,924 $14,546,648 $3,169,012
=========== =========== =========== ==========
Net income per Unit
(66,000 Limited
Partnership Units) $189.16 $18.32 $220.40 $48.02
======= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1995 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,843,518 $ 3,233,686
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 167,176 142,222
Interest income on direct financing
leases in excess of (less than) scheduled rents 450 (292,371)
Scheduled rents on operating leases less
than straight-line adjustments (122,208)
Gain on settlement, net (11,499,176)
Net change in operating assets and
liabilities 18,992 (68,946)
------------ -----------
Net cash provided by operating
activities 3,530,960 2,892,383
------------ -----------
Cash flows from investing activities:
Proceeds from settlement, net 4,850,869
Proceeds from sale of real estate 1,853,816
Payments received in connection with
exercise of purchase option 585,000
------------ -----------
Net cash provided by investing
activities 5,435,869 1,853,816
------------ -----------
Cash flows from financing activities:
Distributions to partners (3,522,918) (2,484,775)
Payments on mortgage principal (917,179)
Partial prepayment of note payable to
affiliate (1,800,000)
Prepayment on mortgage notes payable (1,320,347)
------------ -----------
Net cash used in financing activities (5,760,444) (4,284,775)
------------ -----------
Net increase in cash and cash
equivalents 3,206,385 461,424
Cash and cash equivalents, beginning of
period 8,851,419 1,158,302
------------ -----------
Cash and cash equivalents, end of
period $ 12,057,804 $ 1,619,726
============ ===========
Supplemental disclosure of cash flows information:
Interest paid $ 1,080,275 $ 86,765
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
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,
1995.
Note 2. Distributions to Partners:
-------------------------
Distributions declared and paid to partners during the nine months ended
September 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
------------- ---------------- ---------------- ------------------------
<S> <C> <C> <C>
December 31, 1995 $15,598 $804,540 $12.19
======= ======== ======
March 31, 1996 $16,442 $814,440 $12.34
======= ======== ======
June 30, 1996 $16,675 $817,080 $12.38
======= ======== ======
</TABLE>
A distribution of $12.39 per Limited Partner Unit for the quarter ended
September 30, 1996 was declared and paid in October 1996.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month and nine-month periods ended September 30, 1995, the
Partnership incurred management fees of $407,817 and $487,940, respectively, and
general and administrative expense reimbursements of $26,452 and $71,937,
respectively. For the three-month and nine-month periods ended September 30,
1996, the Partnership incurred management fees of $51,632 and $166,964
respectively, and general and administrative expense reimbursements of $23,971
and $64,865, 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 nine
months ended September 30, 1995 and 1996 were $71,514 and $51,977, respectively.
-5-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 nine-month periods ended
September 30, 1995 and 1996, the Partnership earned its total operating revenues
(rental income plus interest income from financing leases) from the following
lease obligors:
<TABLE>
<CAPTION>
1995 % 1996 %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gibson Greetings, Inc. $4,471,567 84% $1,917,936 47%
Cleo, Inc. 1,008,674 25
Hughes Markets, Inc. 215,834 4 505,597 12
AT&T 343,657 7 344,053 8
New Valley Corporation 275,700 5 275,266 7
Other 46,914 1
---------- ---- ---------- ----
$5,306,758 100% $4,098,440 100%
========== ==== ========== ====
</TABLE>
Note 5. Property in Reno, Nevada:
------------------------
The Partnership and Corporate Property Associates 2 ("CPA(R):2"), an
affiliate, own a property in Reno, Nevada as tenants-in-common with 61% and
39% interests, respectively. The property has been vacant since December
1994 when a lease with New Valley Corporation was terminated pursuant to an
order of the bankruptcy court. On August 28, 1996, the Partnership and
CPA(R):2 entered into a net 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.
Under the lease, the Partnership and CPA(R):2 are obligated to fund an
allowance for tenant improvements to the facility of up to $1,341,600. In
addition, the lease requires the Partnership and CPA(R):2 to repair and/or
replace the HVAC system and roof; such repair costs are estimated to amount
to $228,000. The Partnership's share of allowance and repair costs amount
to approximately $958,000.
The initial lease term of ten years will commence at the earlier of
December 26, 1996 or the date on which Excel commences operations at the
facility. Rent will be $532,800 during the first five years and increase
to $580,800 for the remainder of the initial term (of which the
Partnership's share will be $325,000 and $354,000, respectively). The
lease also provides Excel with two five-year renewal options with the rent
during such renewal terms based on the then prevailing market rate. Excel
has the right to terminate the lease at the end of the sixth lease year.
-6-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Results of Operations:
- ---------------------
The results of operations for the three-month and nine-month periods
ended September 30, 1996 are not directly comparable to the same periods
ended September 30, 1995 as the Partnership recognized a nonrecurring gain
of $11,499,000 on the settlement of its dispute with The Leslie Fay Company
("Leslie Fay") in 1995. Excluding the effect of the gain on settlement,
earnings for the current three-month and nine-month periods decreased by
$7,000 and $111,000, respectively. For both current periods, the decreases
in earnings are due to decreases in lease revenues and other interest
income and, for the current three-month period, an increase in property
expense. These effects were significantly offset by a decrease in interest
expense. The decrease in lease revenues resulted from the lease
restructuring transaction in the fourth quarter of 1995 with Gibson
Greetings, Inc. ("Gibson"). In connection with the restructuring, the
Partnership received a substantial lump sum payment in consideration for
severing one of the properties from the Gibson lease, entering into a lease
for such property with Cleo, Inc. ("Cleo") and modifying the existing lease
with Gibson. The Partnership used the lump sum consideration received from
Gibson to retire the mortgage debt on the Gibson and Cleo properties at the
time of the restructuring. Although the rent from the Gibson and Cleo
properties subsequent to the restructuring was reduced, cash flow (rent
less mortgage debt service) from such properties has remained stable due to
the retirement of the debt. Rentals from Hughes Markets, Inc. increased
primarily as a result of the two-year lease extension agreement which
commenced in May 1996 and which increased annual rentals by $371,000 and
also provides for a lump sum rental payment of $587,000 at the end of such
term. For financial reporting purposes, the lump sum rental payment is
being recognized as rental income on a straight-line basis over the
extended term. The decrease in other interest income was due to the higher
cash balances held in 1995 for the period from which cash was received in
connection with the Leslie Fay settlement before payment of a special
distribution of $120 per Limited Partnership Unit in October 1995. The
decrease in interest expense was due to the satisfaction of all remaining
mortgage debt in 1995, including prepayments of three mortgage loans in the
first quarter and the aforementioned satisfaction of the Gibson mortgage
debt in the fourth quarter. Although property expenses increased during
the three-month period, the increase was primarily due to the timing of
costs incurred for maintaining the Reno, Nevada and Moorestown, New Jersey
properties as costs did not increase for the comparable nine-month periods.
Financial Condition:
- -------------------
There has been no material change in the Partnership's financial
condition since December 31, 1995. Cash flow from operations of $2,892,000
was sufficient to fund distributions to partners of $2,485,000. During the
first quarter, the Partnership sold the property formerly leased to Leslie
Fay and realized cash proceeds of $1,854,000. The Partnership also reduced
its note payable from $2,300,000 to $500,000. With the improvement of the
Partnership's cash balances to $1,620,000, the Partnership should have
sufficient cash reserves to fully fund its $958,000 share of costs required
under the Excel Teleservices, Inc. ("Excel") lease which has been entered
into for the Reno property. To the extent that cash reserves are not at an
acceptable level after funding the Excel improvements, the Partnership has
substantial borrowing capacity as none of the Partnership's properties are
encumbered by mortgage debt. As annual cash flow will increase by $325,000
when Excel commences paying rent, the Partnership may have the ability to
maintain its cash balances at an acceptable level without needing to borrow
any funds. The Partnership received $47,000 during the third quarter for
its share of rents from Sports & Recreation, Inc. ("Sports & Recreation")
for the Moorestown property and has received all subsequent rents. Sports
& Recreation had been in the process of renovating the Moorestown property,
but has decided not to occupy the property. The Partnership and Sports &
Recreation previously engaged in discussions regarding a settlement of the
lease obligation, and the Partnership would consider new settlement
proposals.
The General Partners are currently investigating ways to provide
liquidity for limited partners on a tax-effective basis.
-7-
<PAGE>
CORPORATE PROPERTY ASSOCIATES 3
(a California limited partnership)
PART II
-------
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, the Partnership was
not required to file any reports on form 8-K.
-8-
<PAGE>
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.
11/8/96 By: /s/ Claude Fernandez
- ----------- -----------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
11/8/96 By: /s/ Michael D. Roberts
- ----------- ------------------------------
Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,619,726
<SECURITIES> 0
<RECEIVABLES> 235,072
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,845,798
<PP&E> 31,354,090
<DEPRECIATION> 1,317,424
<TOTAL-ASSETS> 32,156,402
<CURRENT-LIABILITIES> 128,408
<BONDS> 500,000
0
0
<COMMON> 0
<OTHER-SE> 31,527,994
<TOTAL-LIABILITY-AND-EQUITY> 32,156,402
<SALES> 0
<TOTAL-REVENUES> 4,229,950
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 931,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,616
<INCOME-PRETAX> 3,233,686
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,233,686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,233,686
<EPS-PRIMARY> 48.02
<EPS-DILUTED> 48.02
</TABLE>
