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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended JUNE 30, 2002
of
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CPA(R):12
A MARYLAND Corporation
IRS Employer Identification No. 13-3726306
SEC File Number 033-68728
50 ROCKEFELLER PLAZA,
NEW YORK, NEW YORK 10020
(212) 492-1100
CPA(R):12 has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CPA(R):12 HAS NO SECURITIES registered on any exchanges.
CPA(R):12 does not have any Securities registered pursuant to Section 12(b) of
the Act.
CPA(R):12 (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for 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.
CPA(R):12 has no active market for common stock at August 13, 2002.
CPA(R):12 has 30,004,307 shares of common stock, $.001 par value outstanding at
August 13, 2002.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31,
2001 and June 30, 2002 2
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 2001 and 2002 3
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and 2002 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3. - Quantitative and Qualitative Disclosure About Market Risk 13
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 14
Item 6. - Exhibits and Reports on Form 8-K 14
Signatures 15
* 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 12 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 June 30, 2002
(Note) (Unaudited)
----------------- -------------
ASSETS:
Land and buildings, net of accumulated
depreciation of $27,327,123 at December 31,
2001 and $31,034,453 at June 30, 2002 $314,453,691 $311,826,691
Net investment in direct financing leases 41,380,912 41,364,393
Equity investments 54,785,770 53,698,400
Cash and cash equivalents 27,147,331 22,589,369
Other assets 9,473,400 10,736,376
------------ ------------
Total assets $447,241,104 $440,215,229
============ ============
LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $165,889,240 $163,467,455
Accrued interest 966,879 986,133
Accounts payable and accrued expenses 1,272,293 1,059,115
Accounts payable to affiliates 2,907,240 2,637,419
Deferred acquisition fees payable to affiliate 7,218,587 5,860,938
Dividends payable 6,148,332 6,183,383
Prepaid rental income and security deposits 4,007,424 3,863,886
------------ ------------
Total liabilities 188,409,995 184,058,329
------------ ------------
Minority interest 7,907,437 7,917,150
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized,
40,000,000 shares; issued and outstanding
30,482,330 shares at December 31, 2001 and
30,703,065 shares at June 30, 2002 30,482 30,703
Additional paid-in capital 274,728,437 276,958,400
Dividends in excess of accumulated earnings (18,325,307) (22,100,278)
------------ ------------
256,433,612 254,888,825
Less, treasury stock at cost, 592,930 shares at
December 31, 2001 and 708,344 shares at June
30, 2002 (5,509,940) (6,649,075)
------------ ------------
Total shareholders' equity 250,923,672 248,239,750
------------ ------------
Total liabilities and shareholders'
equity $447,241,104 $440,215,229
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the audited
consolidated financial statements at that date.
-2-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Revenues:
Rental income $ 9,964,001 $10,059,283 $20,170,334 $20,104,028
Interest income from direct
financing leases 1,299,206 1,353,467 2,595,397 2,669,590
Interest and other income 289,164 108,325 626,386 217,504
----------- ----------- ----------- -----------
11,552,371 11,521,075 23,392,117 22,991,122
----------- ----------- ----------- -----------
Expenses:
Interest 3,385,577 3,304,576 6,795,730 6,668,520
Depreciation 1,851,660 1,855,445 3,757,638 3,707,330
General and administrative 1,121,171 1,088,759 2,002,440 1,981,890
Property expenses 1,645,583 1,766,068 2,878,813 3,339,539
----------- ----------- ----------- -----------
8,003,991 8,014,848 15,434,621 15,697,279
----------- ----------- ----------- -----------
Income before minority
interest, equity investment,
unrealized gain (loss) and
gain on sale and
extraordinary charge 3,548,380 3,506,227 7,957,496 7,293,843
Minority interest in income (356,854) (365,235) (678,232) (729,113)
Income from equity investments
before extraordinary charge 1,190,422 1,654,839 2,209,546 3,280,959
----------- ----------- ----------- -----------
Income before unrealized gain
(loss) and gain on sale and
extraordinary charge 4,381,948 4,795,831 9,488,810 9,845,689
Unrealized gain (loss) on warrants 511,522 (413,103) 511,522 (494,146)
Gain on sale of real estate 8,865,093 -- 8,865,093 --
----------- ----------- ----------- -----------
Income before extraordinary
charge 13,758,563 4,382,728 18,865,425 9,351,543
Extraordinary charge on early
extinguishment of debt by
equity investee -- -- -- (771,962)
----------- ----------- ----------- -----------
Net income $13,758,563 $ 4,382,728 $18,865,425 $ 8,579,581
=========== =========== =========== ===========
Basic and diluted income per
common share before extraordinary
charge $ .46 $ .15 $ .64 $ .31
Extraordinary charge -- -- -- (.03)
----------- ----------- ----------- -----------
Basic and diluted income per
common share $ .46 $ .15 $ .64 $ .28
=========== =========== =========== ===========
Weighted average shares
outstanding - basic and diluted 29,737,791 30,022,139 29,692,189 29,969,876
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
---------------------------------
2001 2002
------------ ------------
Cash flows from operating activities:
Net income $ 18,865,425 $ 8,579,581
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of financing
costs 3,872,381 3,820,516
Straight-line rent adjustments (570,764) (450,525)
Income from equity investments before
extraordinary charge in excess of
distributions received (328,988) (313,155)
Extraordinary charge on extinguishment of debt
by equity investee -- 771,962
Fees paid by issuance of stock 1,374,961 1,424,837
Minority interest in income 678,232 729,113
Unrealized (gain) loss on warrants (511,522) 494,146
Gain on sale of real estate and securities (8,865,093) --
Change in operating assets and liabilities, net (2,724,936) (1,612,006)
------------ ------------
Net cash provided by operating activities 11,789,696 13,444,469
------------ ------------
Cash flows from investing activities:
Distributions from equity investments in excess
of equity income 1,837,855 628,563
Purchases of real estate and equity investments
and additional capitalized costs (3,344,161) (1,062,268)
Payment of deferred acquisition fees (1,180,073) (1,375,711)
------------ ------------
Net cash used in investing activities (2,686,379) (1,809,416)
------------ ------------
Cash flows from financing activities:
Proceeds from mortgages 18,410,836 --
Prepayments of mortgage principal (8,786,509) --
Payments on mortgage principal (2,166,964) (2,421,785)
Amounts advanced on credit facility -- 10,000,000
Repayments of advances on credit facility -- (10,000,000)
Distributions to minority interest partner (830,095) (719,400)
Capital distributions to minority interest
partner (15,003,000) --
Payment of financing costs and mortgage deposits (961,418) (398,541)
Proceeds from issuance of shares, net of costs 9,750,375 805,347
Dividends paid (11,973,474) (12,319,501)
Purchase of treasury stock (374,543) (1,139,135)
------------ ------------
Net cash used in financing activities (11,934,792) (16,193,015)
------------ ------------
Net decrease in cash and cash equivalents (2,831,475) (4,557,962)
Cash and cash equivalents, beginning of period 17,673,321 27,147,331
------------ ------------
Cash and cash equivalents, end of period $ 14,841,846 $ 22,589,369
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Article 10 of Regulation S-X of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. All significant
intercompany balances and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the results of the interim periods
presented have been included. The results of operations for the interim periods
are not necessarily indicative of results for the full year. For further
information refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Transactions with Related Parties:
The Company incurred asset management fees of $686,747 and $711,675 for the
three months ended June 30, 2001 and 2002, respectively, and $1,374,167 and
$1,422,925 for the six months ended June 30, 2001 and 2002, respectively, with
performance fees in like amount. General and administrative expense
reimbursements were $360,692 and $343,065 for the three months ended June 30,
2001 and 2002, respectively, and $644,679 and $654,628 for the six months ended
June 30, 2001 and 2002, respectively. The Company's asset management and
performance fees payable to its Advisor, W. P. Carey & Co. LLC, are each 1/2 of
1% of Average Invested Assets, as defined in the Company's advisory agreement.
Note 3. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
leasing revenues below for the six-month periods ended June 30, 2001 and 2002
are as follows:
2001 2002
------------ ------------
Per Statements of Income:
Rental income from operating leases $ 20,170,334 $ 20,104,028
Interest from direct financing leases 2,595,397 2,669,590
Adjustment:
Share of leasing revenue applicable to
minority interest (1,521,049) (1,549,905)
Share of leasing revenue from equity
investments 5,889,068 7,882,226
------------ ------------
$ 27,133,750 $ 29,105,939
============ ============
-5-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
For the six-month periods ended June 30, 2001 and 2002, the Company earned its
net leasing revenues from its investments from the following lease obligors:
2001 % 2002 %
----------- --- ----------- ---
Applied Materials, Inc. (a) $ 3,091,656 11% $ 3,145,692 11%
Advanced Micro Devices, Inc. (b) 1,524,250 6 1,629,469 6
Galyan's Trading Company 1,366,577 5 1,366,577 5
Perry Graphic Communications, Inc.
and Judd's Incorporated 1,095,783 4 1,095,783 4
Scott Companies Inc. 1,031,140 4 1,031,140 4
Spectrian Corporation 1,007,761 4 1,015,089 3
Special Devices, Inc. (b) 139,759 -- 981,000 3
Westell Technologies, Inc. 958,193 4 958,193 3
Best Buy Co., Inc. (b) 881,659 3 876,312 3
Career Education Corporation 868,404 3 868,404 3
Telos Corporation 771,629 3 802,199 3
Q Clubs, Inc. 710,086 3 767,910 3
Applied Bioscience International, Inc. 695,857 3 752,095 3
Sicor, Inc. (b) 736,368 3 736,368 2
The Upper Deck Company (b) 693,024 3 726,110 2
McLane Company, Inc. (b) 692,987 3 695,416 2
Compucom Systems, Inc. (b) 652,333 2 678,178 2
The Bon-Ton Stores, Inc. 674,060 2 674,060 2
Del Monte Corporation (c) 643,125 2 643,125 2
Silgan Containers Corporation 637,500 2 637,500 2
Jen-Coat, Inc. -- -- 605,000 2
Textron, Inc. (b) 568,688 2 602,809 2
Childtime Childcare, Inc. 595,037 2 595,037 2
Big V Holding Corp. 536,746 2 540,787 2
Orbseal LLC -- -- 505,875 2
Pacific Logistics, L.P. 465,375 2 501,629 2
Garden Ridge Corporation 497,882 2 497,882 2
BAE Systems, Inc. 794,311 3 -- --
Other 4,803,560 17 5,176,300 18
----------- --- ----------- ---
$27,133,750 100% $29,105,939 100%
=========== === =========== ===
(a) Net of Corporate Property Associates 14 Incorporated's ("CPA(R):14")
minority interest.
(b) Represents the Company's proportionate share of lease revenues from
its equity investments.
(c) Represents the Company's proportionate share of lease revenues from
its equity investments for 2002.
Note 4. Equity Investments:
The Company owns interests in properties leased to corporations through equity
interests in various partnerships and limited liability companies and as
tenants-in-common subject to common control. The ownership interests range from
33.33% to 50%. All of the underlying investments are owned with affiliates that
have similar investment objectives as the Company. The lessees are Best Buy Co.,
Inc., Sicor, Inc., The Upper Deck Company, Advanced Micro Devices, Inc.,
Compucom Systems, Inc., Textron, Inc., McLane Company, Inc., The Fleming
Companies, Inc., Del Monte Corporation and Special Devices, Inc.
-6-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Summarized financial information of the Company's equity investees is as
follows:
(In thousands) December 31, 2001 June 30, 2002
----------------- -------------
Assets (primarily real estate) $353,674 $350,337
Liabilities (primarily mortgage notes payable) 225,827 225,321
Partners' and members' equity 127,847 125,016
Six Months Ended June 30,
-------------------------
2001 2002
-------- --------
Revenues (primarily rental revenue) $ 14,708 $ 19,215
Expenses (primarily interest on
mortgages and depreciation) (9,266) (11,224)
-------- --------
Income before extraordinary charge 5,442 7,991
Extraordinary charge -- (2,086)
-------- --------
Net income $ 5,442 $ 5,905
======== ========
In February 2002, the Best Buy general partnership paid off an existing limited
recourse mortgage loan of $25,743,178 and incurred an extraordinary charge on
early extinguishment of debt as the result of a prepayment premium of $2,086,384
of which the Company's share was $771,962. The retired loan provided for monthly
payments of interest and principal of $291,290 at an annual interest rate of
9.01%. The general partnership obtained a new limited recourse mortgage loan of
$28,500,000 which provides for monthly payments of interest and principal of
$210,427 at an annual interest rate of 7.49%. The loan matures in May 2012 at
which time a balloon payment is scheduled.
Note 5. Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
the Company's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and are
amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on the Company's financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on the Company's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be
-7-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
presented as a discontinued operation for all periods presented. The provisions
of SFAS No. 144 are effective for disposal activities initiated by the Company's
commitment to a plan of disposition after the date of adoption (January 1,
2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, the Company will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented. The Company has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Company does not expect SFAS No. 146 to have a material effect on the
Company's financial statements.
-8-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Corporate Property
Associates 12, Incorporated's ("CPA(R):12") condensed consolidated financial
statements and notes thereto as of June 30, 2002 included in this quarterly
report and CPA(R):12's Annual Report on Form 10-K for the year ended December
31, 2001. This quarterly report contains forward looking statements. Such
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievement of CPA(R):12 to be
materially different from the results of operations or plans expressed or
implied by such forward looking statements. Accordingly, such information should
not be regarded as representations by CPA(R):12 that the results or conditions
described in such statements or the objectives and plans of CPA(R):12 will be
achieved. Item 1 of the Annual Report on Form 10-K for the year ended December
31, 2001 provides a description of CPA(R):12's business objectives, acquisition
and financing strategies and risk factors which could affect future operating
results.
Certain accounting policies are critical to the understanding of CPA(R):12's
financial condition and results of operations. Management believes that an
understanding of financial condition and results of operations requires an
understanding of accounting policies relating to the use of estimates.
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, CPA(R):12 must assess its ability to collect rent
and other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because CPA(R):12's real estate operations have a limited
number of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods.
CPA(R):12 also uses estimates and judgments when evaluating whether long-lived
assets are impaired. When events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, Management performs
projections of undiscounted cash flows, and if such cash flows are insufficient,
the assets are adjusted (i.e., written down) to their estimated fair value. An
analysis of whether a real estate asset has been impaired requires Management to
make its best estimate of market rents, residual values and holding periods. In
its evaluations, CPA(R):12 generally obtains market information from outside
sources; however, such information requires Management to determine whether the
information received is appropriate to the circumstances. As CPA(R):12's
investment objectives are to hold properties on a long-term basis, holding
periods used in the analyses generally range from five to ten years. Depending
on the assumptions made and estimates used, the future cash flow projected in
the evaluation of long-lived assets can vary within a range of outcomes.
CPA(R):12 will consider the likelihood of possible outcomes in determining the
best possible estimate of future cash flows. Because CPA(R):12's properties are
leased to single tenants, CPA(R):12 is more likely to incur significant
writedowns when circumstances deteriorate because of the possibility that a
property will be vacated in its entirety. This makes the risks faced by
CPA(R):12 different than the risks faced by companies that own multi-tenant
properties. Events or changes in circumstances can result in further writedowns
and impact the gain or loss ultimately realized upon sale of the asset.
CPA(R):12 and affiliated REITs are investors in certain real estate ventures.
Certain of the investments are held through incorporated or unincorporated
jointly-held entities and certain investments are held directly as tenants in
common. Substantially all of these investments represent jointly purchased
properties which were net leased to a single tenant and were structured to
provide diversification and reduce concentration of risk from a single lessee
for CPA(R):12 and the affiliated REIT. The placement of an investment in a
jointly-held entity or tenancy-in-common requires the approval of CPA(R):12's
Independent Directors. All of the jointly held investments are structured so
that CPA(R):12 and the affiliated REIT contribute equity, receive distributions
and are allocated profit or loss in amounts that are proportional to their
ownership interests. The presentation of these jointly held investments and
their related results in the accompanying condensed consolidated financial
statements is determined based on factors such as controlling interest,
significant influence and whether either party has the ability to make
independent decisions. All of the jointly held investments are subject to
contractual agreements.
CPA(R):12 recognizes rental income from sales overrides when reported by
lessees, that is, after the level of sales requiring a rental payment to
CPA(R):12 is reached.
CPA(R):12 classifies its directly-owned leased assets for financial reporting
purposes as either real estate leased under the operating method or net
investment in direct financing leases based on several criteria, including, but
not limited
-9-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
to, estimates of the remaining economic life of the leased assets and the
calculation of the present value of future minimum rents. In determining the
classification of a lease, CPA(R):12 uses estimates of remaining economic life
provided by independent appraisals of the leased assets. The calculation of the
present value of future minimum rents includes determining a lease's implicit
interest rate which requires an estimate of the residual value of leased assets
as of the end of the noncancellable lease term. Different estimates of residual
value result in different implicit interest rates and could possibly affect the
financial reporting classification of leased assets.
RESULTS OF OPERATIONS:
Net income for the three months and six months ended June 30, 2002 decreased by
$9,376,000 and $10,286,000, respectively as compared with the three months and
six months ended June 30, 2001. Excluding unrealized gains and losses on
warrants and CPA(R):12's $772,000 share of an extraordinary charge on early
extinguishment of debt in 2002 and the $8,865,000 gain on the sale of a property
in 2001, income for the comparable three month and six month periods increased
by $414,000 and $356,000, respectively. The increases in income before gains and
losses and the extraordinary charge were primarily due to an increase in income
from equity investments and a moderate decrease in general and administrative
expenses. In the fourth quarter of 2001, the Company's 50% interest in
properties leased to Del Monte Corporation were reclassified to an equity
investment. In connection with the reclassification, CPA(R):12 records its share
of net income as a component of equity investments. For the three-month and
six-month periods ended June 30, 2001, the accompanying condensed consolidated
financial statements reflect the pro rata share of revenues and expenses from
the Del Monte properties. While this affects the comparability of rental
revenue, interest expense and depreciation, it had no overall effect on the
results of operations for the comparable periods.
Net of the effect of Del Monte reclassification, equity income increased by
$324,000 and $795,000 for the three-month and six-month periods. The increases
are primarily due to CPA(R):12's investments in properties leased to Special
Devices, Inc. that were acquired in June 2001, and the re-leasing of a property
in Grand Rapids in August 2001 which had been vacant and, to a lesser extent,
rent increases at other properties which are accounted for as equity
investments. The extraordinary charge on early extinguishment of debt by equity
investee was due to a prepayment premium paid in connection with the payoff of
the mortgage loan on twelve retail properties under a master lease with Best Buy
Co., Inc. The charge represents CPA(R):12's share of the prepayment premium. A
new limited recourse mortgage loan on the Best Buy properties has been obtained,
and as a result of the refinancing, annual cash available for distribution to
CPA(R):12 from the Best Buy equity investment will increase by approximately
$360,000.
Lease revenues (rental income and interest income from direct financing leases)
increased by $150,000 and $8,000 for the three-month and six-month periods;
however, Del Monte contributed lease revenues of $321,000 and $643,000 for the
three-month and six-month periods ended June 30, 2001 but were a component of
income from equity investments in 2002. Additionally, the BAE Systems, Inc.
property, sold in May 2001, contributed lease revenues of $213,000 and $794,000.
The funds from the BAE property sale were redeployed in properties leased to
Orbseal LLC and Jen-Coat, Inc. as well as the equity investment in the Special
Devices properties. Orbseal and Jen-Coat provided rents of $555,000 and
$1,111,000 for the three-month and six-month periods ended June 30, 2002.
Additionally, rent increases on twelve leases have occurred since June 30, 2001
resulting in an increase of annual rents of $628,000.
Property expense increased due to an increase in CPA(R):12's reserves for
uncollected rents. International Management Consulting, Inc. ("IMCI") and
Randall International, Inc. are currently experiencing financial difficulties
and are paying only a portion of their rents. As of June 30, 2002, unpaid rents
from these two lessees totaled $565,000. CPA(R):12 is currently negotiating a
lease modification with IMCI, and in July 2002 entered into an agreement with
Randall. Under the proposal, IMCI would be granted a short-term deferral of rent
and a schedule would be established to systematically pay off its rent
arrearage. IMCI would grant CPA(R):12 warrants for common stock. There is no
assurance that the modification will be completed and Management is closely
monitoring IMCI. Under the Randall agreement, Randall is scheduled to start
paying its deferred amounts and has granted CPA(R):12 warrants which are
convertible into a 5% interest in the company.
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION:
There has been no material change in CPA(R):12's financial condition since
December 31, 2001. One of CPA(R):12's primary objectives is to use the cash flow
from its net leases (including its equity investments) to meet operating
expenses, fund an increasing rate of dividends to shareholders and cover debt
service. Cash flows from operations and equity investments of $14,073,000 were
sufficient to pay dividends of $12,320,000 and distributions of $719,000 to
minority interest partners, but were not sufficient to fully cover debt mortgage
principal installments of $2,422,000, resulting in a shortfall of $1,388,000.
The deficit was due, in part, to the increase in unpaid rents from IMCI and
Randall and an annual payment of accrued interest on deferred acquisition fees
which is paid annually in January.
CPA(R):12's ability to increase cash from operations has also been negatively
affected because of maintaining a high level of cash balances. As of June 30,
2002, CPA(R):12 had cash balances of $22,589,000 of which $18,606,000 is
available for investment in real estate. Until suitable investments have been
selected, the funds are conservatively invested in stable but low-yielding money
market investments. Cash flows from operations are projected to increase
substantially after the funds are invested in real estate. Based on Management's
projections, when the funds are invested in net lease real estate, cash
generated from operations should be sufficient to meet dividend objectives, meet
principal payments and minority interest distributions. On a long-term basis,
prudent selection of appropriate investments is of greater concern than
investing funds as quickly as possible.
When evaluating cash generated from operations, Management includes cash
provided from equity investments. Under accounting principles generally accepted
in the United States of America, distributions in excess of income from equity
investments are a return of capital and presented as an investing cash flow. The
ability to distribute cash from CPA(R):12's equity investees in excess of their
income is primarily due to noncash charges for depreciation. Therefore,
Management evaluates its ability to meet dividend objectives by combining such
cash flows with cash flow from operating activities.
CPA(R):12's investing activities include the payment of $1,376,000 of deferred
acquisition fees to its Advisor, which installment is paid annually in January,
and funding a $903,000 expansion of an existing facility leased to Celadon
Group, Inc. The Celadon expansion was completed in May 2002 at an increase in
Celadon's annual rent of $97,000. CPA(R):12 has no current commitments for
expansion or improvement to its existing properties.
In addition to using cash to pay dividends to shareholders, distributions to
minority partners and principal amortization, CPA(R):12's financing activities
include using $1,139,000 to purchase treasury stock and obtaining $854,000 of
net proceeds from the issuance of shares under its dividend reinvestment plan.
CPA(R):12 also issued shares to its Advisor in satisfaction of performance fees.
In January 2002, CPA(R):12 used $10,000,000 from its $20,000,000 credit line in
connection with funding the payoff of the mortgage loan on the Best Buy
properties. The advance under the credit line was paid off in full from the
refinancing of the Best Buy mortgage. Management believes that the credit line
provides significant flexibility in meeting any potential liquidity needs of
CPA(R):12. The credit agreement requires CPA(R):12 to meet certain financial
covenants, including restrictions on indebtedness and meeting or exceeding
certain operating and coverage ratios. The credit facility is a general
obligation of CPA(R):12 and matures in October 2003. As of June 30, 2002, no
amounts are outstanding under the facility. With its current cash balances,
amounts available from the line of credit and the ability to leverage several
properties, CPA(R):12 believes that it has more than sufficient liquidity.
CPA(R):12 and certain affiliates are currently negotiating with a single lender
to obtain limited recourse mortgage financing on currently unencumbered
properties or refinance existing mortgage loans on several leased properties. In
the event the negotiations are successful, the lender will pool the loans and
place them in a trust that will sell the interests as collateralized mortgage
obligations ("CMO") in a private placement to institutional investors. The sole
assets of the trust would consist of the loans from CPA(R):12 and its
affiliates. CPA(R):12 and its affiliates believe that the ability to securitize
its mortgage obligations in a CMO pool facilitates placement of mortgage
financing on a wider range of properties including, but not limited to,
supermarkets, movie theaters and health clubs and at more favorable interest
rates. None of the loans will be cross-collateralized nor include cross-default
provisions.
As a condition of pooling the loans, CPA(R):12 and its affiliates would acquire
a separate class of interests in the trust (the "CPA(R) Interests").
Distributions to the CPA(R) Interests would be subordinate to all ownership
interests in the
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
trust and payable only when all other distributions are current. The ability to
pay distributions to the CPA(R) Interests may be affected by defaults on any of
the loans resulting from the nonpayment of rent by lessees. If there are no or
few defaults, ownership of the subordinated CPA(R) Interests may provide
additional income to CPA(R):12. The sale of the loans and related formation of
the trust is currently scheduled for the third quarter; however, there is no
assurance that the contemplated transaction will be completed.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
CPA(R):12's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and will
be amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on CPA(R):12's financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on CPA(R):12's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the company's commitment to a plan of disposition after
the date of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, CPA(R):12 will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented. CPA(R):12 has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
CPA(R):12 does not expect SFAS No. 146 to have a material effect on its
financial statements.
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates and
equity prices. In pursuing its business plan, the primary market risk to which
CPA(R):12 is exposed is interest rate risk.
The value of CPA(R):12's real estate is subject to fluctuations based on changes
in interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect CPA(R):12's ability to
refinance its debt when balloon payments are scheduled.
Approximately $158,177,000 of CPA(R):12's long-term debt bears interest at fixed
rates, and the fair value of these instruments is affected by changes in market
interest rates. The following table presents principal cash flows based upon
expected maturity dates of the debt obligations and the related weighted-average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate on the fixed rate debt as of June 30, 2002 ranged from 6.50% to 10.25%. The
interest rate on the variable rate debt as of June 30, 2002 was 5.3387%. There
has been no material change since December 31, 2001.
(in thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $2,792 $5,126 $5,571 $10,036 $11,102 $ 123,550 $158,177 $ 159,936
Average interest
rate 8.02% 7.50% 7.52% 7.80% 7.83% 7.63%
Variable rate
debt $ 78 $5,212 -- -- -- -- $ 5,290 $ 5,290
-13-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders meeting was held on June 11, 2002, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a one-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No Shares Abstaining
---------------- ------------------- ----------------- ---------------- -----------------
William P. Carey 15,642,060 15,498,049 8,300 135,711
Francis X. Diebold 15,642,060 15,496,204 10,145 135,711
Elizabeth P. Munson 15,642,060 15,491,504 14,845 135,711
William Ruder 15,642,060 15,465,870 40,479 135,711
George E. Stoddard 15,642,060 15,457,296 49,053 135,711
Ralph F. Verni 15,642,060 15,503,099 3,250 135,711
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Chief Executive Officer's Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended June 30, 2002, CPA(R):12 was not required
to file any reports on Form 8-K.
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
8/13/02 By: /s/ John J. Park
----------- --------------------------------
Date John J. Park
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
8/13/02 By: /s/ Claude Fernandez
----------- --------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-15-