-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EBHAhmJ+oCWUR2vWFIjlrqu0WTLHr2jcpdi8ODVFuEr2Z+HHYjwEGWrnMg4W+8DO lkjHo+YVdQlHmnp8flk4Pg== 0000950123-97-007554.txt : 19970912 0000950123-97-007554.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950123-97-007554 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970904 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE PROPERTY ASSOCIATES 3 CENTRAL INDEX KEY: 0000350745 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 942708080 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-10322 FILM NUMBER: 97675187 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 10-K405/A 1 CORPORATE PROPERTY ASSOCIATES 3 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (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, 1996 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 Section 12(g) of the Act: LIMITED 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 deliquent 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 Limited Partnership Units. 2 PART II Item 8. Financial Statements and Supplementary Data. (i) Report of Independent Accountants. (ii) Balance Sheets as of December 31, 1995 and 1996. (iii) Statements of Income for the years ended December 31, 1994, 1995 and 1996. (iv) Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996. (v) Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (vi) Notes to Financial Statements. 3 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, 1995 and 1996, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. 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 audits 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, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996, 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 17, 1997 -5- 4 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) BALANCE SHEETS December 31, 1995 and 1996
1995 1996 ---- ---- ASSETS: Real estate leased to others: Accounted for under the operating method: Land $ 1,255,499 $ 1,255,499 Buildings 4,514,428 4,817,871 ----------- ----------- 5,769,927 6,073,370 Accumulated depreciation 1,175,202 1,364,095 ----------- ----------- 4,594,725 4,709,275 Net investment in direct financing leases 25,291,792 25,689,201 ----------- ----------- Real estate leased to others 29,886,517 30,398,476 Real estate held for sale 1,853,816 Cash and cash equivalents 1,158,302 1,496,001 Accrued interest and rents receivable 210,362 200,696 Other assets 114,160 435,177 ----------- ----------- Total assets $33,223,157 $32,530,350 =========== =========== LIABILITIES: Note payable to affiliate $ 2,300,000 $ 500,000 Accounts payable and accrued expenses 86,776 63,200 Accounts payable to affiliates 57,298 73,313 ----------- ----------- Total liabilities 2,444,074 636,513 ----------- ----------- Commitments and contingencies PARTNERS' CAPITAL: General Partners 191,606 214,807 Limited Partners (66,000 Limited Partnership Units issued and outstanding) 30,587,477 31,679,030 ----------- ----------- Total partners' capital 30,779,083 31,893,837 ----------- ----------- Total liabilities and partners' capital $33,223,157 $32,530,350 =========== ===========
The accompanying notes are an integral part of the financial statements. -6- 5 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) STATEMENTS of INCOME For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ----------- ----------- ----------- Revenues: Rental income $ 287,779 $ 290,657 $ 845,257 Interest income from direct financing leases 7,055,695 6,502,361 4,735,487 Other interest Income 48,378 230,926 74,338 Other income 225,321 75,000 ----------- ----------- ----------- 7,391,852 7,249,265 5,730,082 ----------- ----------- ----------- Expenses: Interest 1,602,175 1,255,047 75,158 Depreciation 158,567 198,590 188,893 General and administrative 309,069 372,006 326,082 Property expenses 1,387,498 781,442 705,915 Amortization 22,405 19,605 Writedown to net realizable value 697,325 146,184 ----------- ----------- ----------- 4,177,039 2,772,874 1,296,048 ----------- ----------- ----------- Income before gain on settlement 3,214,813 4,476,391 4,434,034 Gain on settlement, net of $7,400,000 writedown to net realizable value 11,499,176 ----------- ----------- ----------- Net income $ 3,214,813 $15,975,567 $ 4,434,034 =========== =========== =========== Net income allocated to: Individual General Partner $ 3,215 $ 15,976 $ 4,434 =========== =========== =========== Corporate General Partner $ 61,081 $ 303,536 $ 84,247 =========== =========== =========== Limited Partners $ 3,150,517 $15,656,055 $ 4,345,353 =========== =========== =========== Net income per Unit (66,000 Limited Partnership Units outstanding) $ 47.74 $ 237.21 $ 65.84 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. -7- 6 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) STATEMENTS of PARTNERS' CAPITAL For the years ended December 31, 1994, 1995 and 1996
Partners' Capital Accounts --------------------------------------------------------------- Limited Partners' General Limited Amount Per Total Partners Partners Unit (a) ------------ ------------ ------------ ------------ Balance, December 31, 1993 $ 28,967,437 $ 75,372 $ 28,892,065 $ 438 Distributions (4,656,367) (93,127) (4,563,240) (69) Net income 1994 3,214,813 64,296 3,150,517 48 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
(a) Based on 66,000 Units issued and outstanding during all periods. The accompanying notes are an integral part of the financial statements. -8- 7 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) STATEMENTS of CASH FLOWS For the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ------------ ------------ ------------ Cash flows from operating activities: Net Income $ 3,214,813 $ 15,975,567 $ 4,434,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 180,972 218,195 188,893 Gain on settlement, net (11,499,176) Restructuring fees received, net of costs 8,150,941 Cash receipts on direct financing leases in excess of (less than) amortization of unearned income and straight-line adjustments 9,046 (26,973) (592,942) Writedown to net realizable value 697,325 146,184 Net change in operating assets and liabilities 545,219 (47,161) (123,379) ------------ ------------ ------------ Net cash provided by operating activities 4,647,375 12,917,577 3,906,606 ------------ ------------ ------------ Cash flows from investing activities: Capitalized costs (303,443) 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 2,286,195 585,000 ------------ ------------ ------------ Net cash provided by investing activities 2,286,195 5,435,869 1,550,373 ------------ ------------ ------------ Cash flows from financing activities: Distributions to partners (4,656,367) (12,722,367) (3,319,280) Payment of mortgage principal (1,453,396) (1,113,283) Prepayment of mortgage principal (14,510,913) Payment of note to affiliate (1,800,000) Proceeds from issuance of note to affiliate 2,300,000 ------------ ------------ ------------ Net cash used in financing activities (6,109,763) (26,046,563) (5,119,280) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 823,807 (7,693,117) 337,699 Cash and cash equivalents, beginning of year 8,027,612 8,851,419 1,158,302 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 8,851,419 $ 1,158,302 $ 1,496,001 ============ ============ ============ Supplemental cash flows information: Interest paid $ 1,613,684 $ 1,357,609 $ 97,192 ============ ============ ============
The accompanying notes are an integral part of the financial statements. -9- 8 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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, revenue is recognized as rentals are earned 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 net realizable 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 ("CPI"). Real Estate Held for Sale: Real estate held for sale is accounted for at the lower of cost or fair value less costs to sell. 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, 1995 and 1996 were held in the custody of two financial institutions. Continued -10- 9 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 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 Corporate General Partner purchased 200 Limited Partnership Units in connection with the Partnership's public offering. The Partnership will terminate on December 31, 2018, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement"). The Agreement provides that the General Partners are allocated 2% (.1% to the Individual General Partner, William P. Carey, and 1.9% to the Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey") and the Limited Partners are allocated 98% of the profits and losses as well as distributions of distributable cash from operations, as defined. The partners are also entitled to receive net proceeds from the sale of the Partnership properties as defined in the Agreement. The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of Partnership assets. Pursuant to the subordination provisions of the Agreement, the preferred return may be paid only after the limited partners receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return ranging from 6% to 9% since the inception of the Partnership. The General Partners interest in such preferred return amounts to $731,823 based upon the cumulative proceeds from the sale of assets since the inception of the Partnership through December 31, 1996. The Partnership's ability to satisfy the subordination provisions of the Agreement may not be determinable until liquidation of a substantial portion of the Partnership's assets has been made, formal plans of liquidation are adopted or limited partnership units are converted to other securities which provide the security holder with greater liquidity than a limited partnership unit. Management believes that as of the report date, ultimate payment of the preferred return is reasonably possible but not probable, as defined pursuant to Statement of Financial Accounting Standards No. 5. 3. Transactions with Related Parties: Under the Agreement, a division of W.P. Carey is also entitled to receive a property management fee and reimbursement of certain expenses incurred in connection with the Partnership's operations. Property management fee in 1995 includes the effects of certain transactions described in Notes 10 and 11. 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. Property management fee and general and administrative expense reimbursements are summarized as follows:
1994 1995 1996 ---- ---- ---- Property management fee $162,711 $ 930,191 $ 218,507 General and administrative expense reimbursements 84,839 86,183 84,519 -------- ---------- ---------- $247,550 $1,016,374 $ 303,026 ======== ========== ==========
During 1994, 1995 and 1996, fees and expenses aggregating $32,352, $96,306 and $284,067, respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner. Continued -11- 10 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 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. Net expenses incurred in 1994, 1995 and 1996 were $53,757, $87,907 and $67,625, respectively. The Partnership incurred interest expense of $75,158 on its note payable to an affiliate. The loan, evidenced by a promissory note, bears interest at the prime rate and is due on demand. The Partnership's ownership interests in certain properties are jointly held with affiliated entities as tenants-in-common with the Partnership's 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 a noncancelable operating leases amount to approximately $1,188,000 in 1997; $1,323,000 in 1998; $511,000 in 1999 through 2001 and aggregate approximately $6,369,000 through 2012. Contingent rents were approximately $36,000 in 1994, $39,000 in 1995 and $18,000 in 1996. 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, ------------ 1995 1996 ------------ ------------ Minimum lease payments receivable $ 72,193,297 $ 67,855,219 Unguaranteed residual value 33,409,444 33,409,444 ------------ ------------ 105,602,741 101,264,663 Less, Unearned income 80,310,949 75,575,462 ------------ ------------ $ 25,291,792 $ 25,689,201 ============ ============
Scheduled future minimum rents, exclusive of renewals, under noncancelable direct financing leases amount to approximately $4,375,000 in 1997, $4,339,000 in 1998, $4,321,000 in 1999, $4,360,000 in 2000 and $4,871,000 in 2001 and aggregate approximately $67,855,000 through 2013. Contingent rents were approximately $1,904,000 in 1994 and $1,142,000 in 1995. No contingent rents were realized in 1996. 6. Distributions: Distributions are declared and paid to partners quarterly and are summarized as follows:
Year Ending Distributions Paid to Distributions Paid to Per Limited December 31, General Partners Limited Partners Partners Unit - -------------- --------------------- --------------------- ------------- 1994 $ 93,127 $ 4,563,240 $ 69.14 =========== =========== ======== 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 =========== =========== ========
Continued -12- 11 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued Distributions of $16,671 to the General Partners and $818,400 to the Limited Partners for the quarter ended December 31, 1996 were declared and paid in January 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:
1994 1995 1996 ------------ ------------ ------------ Net income per Statements of Income $ 3,214,813 $ 15,975,567 $ 4,434,034 Excess tax depreciation (1,423,529) (1,364,376) (880,310) Recognition of purchase installments as operating income 2,286,195 (5,880,601) Writedown to net realizable value 697,325 7,546,184 Restructuring fee 8,150,941 Other (312,950) (474,841) (407,625) ------------ ------------ ------------ Income reported for Federal income tax purposes $ 4,461,854 $ 23,952,874 $ 3,146,099 ============ ============ ============
8. Industry Segment Information: The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate. In 1994, 1995 and 1996, the Partnership earned its total operating revenues (rental income plus interest income from direct financing leases) from the following lease obligors:
1994 % 1995 % 1996 % ---------- ---------- ---------- ---------- ---------- ---------- Gibson Greetings, Inc. $5,962,090 81% $5,525,671 81% $2,560,499 46% Cleo, Inc. 150,885 2 1,349,237 24 Hughes Markets, Inc. 287,779 4 290,657 4 747,946 13 AT&T Corporation 457,818 6 458,275 7 458,807 8 New Valley Corporation 635,786 9 367,530 6 366,944 7 Sports & Recreation, Inc. 93,829 2 Excel Telecommunications, Inc. 3,482 ---------- ---------- ---------- ---------- ---------- ---------- $7,343,473 100% $6,793,018 100% $5,580,744 100% ========== ========== ========== ========== ========== ==========
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. In connection with the lease termination, the Partnership Continued -13- 12 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued wrote down the Reno property in 1994 to its estimated net realizable value of $2,000,000 and recognized a charge of $697,325 on the writedown. New Valley continues to lease 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 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 offer of $300,000 as a settlement in exchange for being released from its lease obligations. Sports & Recreation has paid all scheduled rents. The Partnership and CPA(R):2 expect that Sports & Recreation will resume discussions for the purposes of reaching a termination settlement; however, no discussions are currently in progress. On August 28, 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 Telecommunications, Inc. The initial lease term commenced on December 26, 1996. Annual rent during the first five years is $532,800 increasing to $580,800 thereafter (of which the Partnership's share is $325,000 and $354,200, respectively). The lease, which has a term of ten years, 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. In connection with the termination of the Moorestown and Reno leases, the Partnership and CPA(R):2 expect to receive a bankruptcy settlement from New Valley. The amount of such settlement cannot be estimated and no amounts that the Partnership may ultimately receive have 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 interest obligation that had been accrued on the Leslie Fay monthly payments, offset by the writedown of $7,400,000 and aggregate management fees, payable to an affiliate, of $323,280 on the monthly payments received from Leslie Fay since the beginning of the dispute in 1992. Of the rent received, $5,435,869 was received in 1995. Under the settlement agreement, Leslie Fay was required to dismiss with prejudice all of its suits filed against the Partnership, and the Partnership's bankruptcy claim against Leslie Fay, as an unsecured creditor, was reduced to $2,650,000. The bankruptcy claim is pending and the Partnership may not realize the full amount of the bankruptcy claim. As the fair value of the property was no longer impacted 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 is netted against the 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. Continued -14- 13 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued On January 10, 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. 11. Properties Leased to Gibson Greetings, Inc.: In January 1982, the Partnership and CPA(R):2 entered into a net lease with Gibson Greetings, Inc. ("Gibson"), for three properties in Memphis, Tennessee; Berea, Kentucky; and Cincinnati, Ohio. In 1988, the Partnership and CPA(R):2 consented to Gibson's sublease of the Memphis, Tennessee property to a wholly-owned subsidiary, Cleo, Inc. ("Cleo"). The lease for the three properties had an initial term of 20 years with two five-year renewal options and provided for minimum annual rentals of $5,865,000 with rent increases every five years based on a formula indexed to the CPI. The lease also provided Gibson with a purchase option which was exercisable during the tenth year of the lease and at the end of the initial term. Gibson declined to exercise its purchase option in 1992. In connection with Gibson's sale of the Cleo subsidiary to CSS Industries, Inc. ("CSS"), the Partnership, CPA(R):2 and Gibson entered into an agreement on November 15, 1995, whereby the Memphis, Tennessee property occupied by Cleo was severed from the Gibson master lease, the Gibson lease was amended and Cleo entered into a separate lease for the Tennessee property with CSS as the guarantor of Cleo's lease obligations. The Partnership and CPA(R):2 received $12,200,000 (of which the Partnership's share was $8,723,000) as a one-time lump sum payment in consideration for severing the Tennessee property from the Gibson master lease. Gibson still retains certain specific obligations for any environmental violations which may be detected and which resulted from any pre-existing conditions at the Tennessee property. The Gibson lease on the two remaining properties in Kentucky and Ohio, as amended, provides for an initial term which has been extended through November 30, 2013, and provides for one renewal term of ten years. Annual rent is $3,100,000 (of which the Partnership's share is approximately $2,367,000), with stated increases of 20% every five years through the end of the renewal term. The lease includes new purchase options exercisable on November 30, 2005 and 2010 and Gibson has the right to exercise the purchase option on either one of its leased properties or both. The option is exercisable at fair market value of the properties as encumbered by the lease. The Cleo lease provides for a ten-year term through December 31, 2005 with two five-year renewal terms. Annual rent is $1,500,000 (of which the Partnership's share is approximately $1,145,000), and there is a rent increase effective January 1, 2001. The rent increase will be based on a formula indexed to the CPI; however, the increased annual rent will be at least $1,689,000 but no more than $1,898,000. Cleo has an option to purchase the property at any time during the term of the lease so long as there is no monetary default. Exercise of the purchase option requires at least six months' notice. The exercise price is the greater of (i) $15,000,000 or (ii) fair market value capped at a maximum of $16,250,000. In connection with the payment made by Gibson to sever the Tennessee property from the Gibson lease, the Partnership deferred recognition of a gain on restructuring of $8,150,941, consisting of the Partnership's $8,723,000 share of the lump sum payment offset by costs of $572,059, including management fees of $429,560, payable to an affiliate, with such deferred gain included in the net investment in direct financing leases. The Partnership is amortizing such deferred gain over the remaining initial terms of the Gibson and Cleo direct financing leases. Such amortization, included in interest income from direct financing leases, was $398,065 in 1996. The net proceeds from the agreement as well as other available funds were used to pay off the Partnership's share of the mortgage loan collateralized by the Gibson properties of $13,190,566 in November 1995. Continued -15- 14 CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership) NOTES to FINANCIAL STATEMENTS, Continued 12. 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, Hughes' monthly rent increased to $336,166 (of which the Partnership's share is $56,341) from $151,686 (of which the Partnership's share was $25,420). At the end of the lease term, 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 in the amount of $3,500,000, an amount equal to Hughes' lump sum payment obligation. For financial reporting purposes, the $3,500,000 lump sum rental payment due at the end of the lease term is being recognized on a straight-line basis over the lease extension term. For the year ended December 31, 1996, the difference between scheduled rents under the lease and rent recognized for financial reporting purposes including the adjustment for lump sum payment amounts to $195,533. 13. 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. The costs for remediation, which are being performed and paid for by the affected tenant at three of the properties, are not expected to be material. In the event that the Partnership absorbs a portion of such costs because of a tenant's failure to fulfill its obligations, the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations. 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. 14. 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. Continued -16- 15 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: W. P. CAREY & CO., INC. 09/03/97 BY: /s/ Steven M. Berzin - -------------- -------------------------------- Date Claude Fernandez Executive Vice President and Chief Financial Officer (Principal Financial Officer) 09/03/97 BY: /s/ Claude Fernandez - -------------- -------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) -17- -----END PRIVACY-ENHANCED MESSAGE-----