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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended SEPTEMBER 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 November 11, 2002.
CPA(R):12 has 30,126,668 shares of common stock, $.001 par value outstanding at
November 11, 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 September 30, 2002 2
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2001 and 2002 3
Condensed Consolidated Statements of Comprehensive
Income for the three and nine months ended September 30,
2001 and 2002 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2001 and 2002 5-6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
Item 3. - Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. - Controls and Procedures 17
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20-21
* 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 September 30, 2002
----------------- ------------------
(Note) (Unaudited)
------ -----------
ASSETS:
Land and buildings, net of accumulated depreciation of $27,327,123
at December 31, 2001 and $32,893,090 at September 30, 2002 $314,453,691 $309,968,054
Net investment in direct financing leases 41,380,912 32,566,378
Equity investments 54,785,770 57,717,012
Cash and cash equivalents 27,147,331 50,455,308
Marketable securities - 8,574,895
Other assets 9,473,400 14,029,640
----------- -----------
Total assets $447,241,104 $473,311,287
=========== ===========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $165,889,240 $196,294,032
Accrued interest 966,879 1,090,073
Accounts payable and accrued expenses 1,272,293 1,570,621
Accounts payable to affiliates 2,907,240 2,740,021
Deferred acquisition fees payable to affiliates 7,218,587 5,860,938
Dividends payable 6,148,332 6,205,646
Prepaid rental income and security deposits 4,007,424 5,347,501
----------- -----------
Total liabilities 188,409,995 219,108,832
----------- -----------
Minority interest 7,907,437 7,925,960
----------- -----------
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 30,788,663 shares at September 30, 2002 30,482 30,789
Additional paid-in capital 274,728,437 277,823,948
Dividends in excess of accumulated earnings (18,325,307) (24,879,991)
Accumulated other comprehensive loss - (3,148)
----------- -----------
256,433,612 252,971,598
Less, treasury stock at cost, 592,930 shares at December 31, 2001
and 713,094 shares at September 30, 2002 (5,509,940) (6,695,103)
----------- -----------
Total shareholders' equity 250,923,672 246,276,495
----------- -----------
Total liabilities and shareholders' equity $447,241,104 $473,311,287
=========== ===========
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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------ -------------
2001 2002 2001 2002
------ ------ ------ ------
Revenues:
Rental income $ 9,920,648 $10,100,404 $30,090,982 $30,204,432
Interest income from direct financing leases 1,300,453 1,052,641 3,895,850 3,722,231
Interest and other income 207,220 598,157 833,606 815,661
---------- ---------- ---------- ----------
11,428,321 11,751,202 34,820,438 34,742,324
---------- ---------- ---------- ----------
Expenses:
Interest 3,146,672 3,543,303 9,942,402 10,211,823
Depreciation 1,834,175 1,858,637 5,591,813 5,565,967
General and administrative 1,236,416 1,025,400 3,238,856 3,007,290
Property expenses 1,855,961 1,956,864 4,734,774 5,296,403
--------- ---------- ---------- ----------
8,073,224 8,384,204 23,507,845 24,081,483
--------- ---------- ---------- ----------
Income before minority interest, equity
investment, unrealized gain (loss) and
gain on sale and extraordinary charge 3,355,097 3,366,998 11,312,593 10,660,841
Minority interest in income (361,947) (371,151) (1,040,179) (1,100,264)
Income from equity investments before
extraordinary charge 1,196,159 1,803,376 3,405,705 5,084,335
--------- ---------- ---------- ----------
Income before unrealized gain (loss) and
gain on sale and extraordinary charge 4,189,309 4,799,223 13,678,119 14,644,912
Unrealized gain (loss) on warrants 1,656,128 100,140 2,167,650 (394,006)
Gain on sale of real estate (1,384) - 8,863,709 -
--------- ---------- ---------- ----------
Income before extraordinary charge 5,844,053 4,899,363 24,709,478 14,250,906
Extraordinary charge on early extinguishment
of debt (including $960,602 of equity
investees) - (1,473,149) - (2,245,111)
--------- ---------- ---------- ----------
Net income $ 5,844,053 $ 3,426,214 $24,709,478 $12,005,795
========== ========== ========== ==========
Basic and diluted income per common share
before extraordinary charge $ .20 $ .16 $ .83 $ . 48
Extraordinary charge - (.05) - (.08)
---------- ---------- ---------- ----------
Basic and diluted income per common share $ .20 $ .11 $ .83 $ .40
========== ========== ========== ==========
Weighted average shares outstanding - basic
and diluted 29,800,289 30,074,431 29,728,618 30,003,632
========== ========== ========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2001 2002 2001 2002
------ ------ ------ ------
Net income $ 5,844,053 $ 3,426,214 $24,709,478 $12,005,795
Other comprehensive loss:
Change in unrealized loss on
marketable securities - (3,148) - (3,148)
---------- ---------- ---------- ----------
Comprehensive income $ 5,844,053 $ 3,423,066 $24,709,478 $12,002,647
========== ========== ========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2001 2002
---- ----
Cash flows from operating activities:
Net income $ 24,709,478 $ 12,005,795
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,841,079 5,787,509
Straight-line rent adjustments (858,130) (686,239)
Income from equity investments before extraordinary charge in
excess of distributions received - (486,574)
Extraordinary charge on extinguishment of debt (including
$960,602 by equity investees) - 2,245,111
Fees paid by issuance of stock 2,061,707 2,136,830
Minority interest in income 1,040,179 1,100,264
Unrealized (gain) loss on warrants (2,167,650) 394,006
Gain on sale of real estate and securities (8,863,709) -
Noncash settlement income - (371,294)
Change in operating assets and liabilities, net (1,570,154) (339,195)
----------- -----------
Net cash provided by continuing operations 20,192,800 21,786,213
Prepayment premium on extinguishment of debt - (1,225,092)
----------- -----------
Net cash provided by operating activities 20,192,800 20,561,121
----------- -----------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 1,026,059 952,645
Purchases of real estate and equity investments and additional
capitalized costs (9,097,200) (1,062,268)
Purchase of securities - (10,075,022)
Proceeds from sale of securities - 1,493,400
Payment of deferred acquisition fees (1,180,073) (1,375,711)
Capital distribution received from equity investment - 1,766,449
----------- -----------
Net cash used in investing activities (9,251,214) (8,300,507)
----------- -----------
Cash flows from financing activities:
Proceeds from mortgages (a) 25,560,836 44,704,110
Prepayments of mortgage principal (8,786,509) (8,908,195)
Payment of note payable (4,300,000) -
Payments of mortgage principal (3,279,659) (3,621,108)
Amounts advanced on credit facility - 10,000,000
Repayments of advances on credit facility - (10,000,000)
Distributions to minority interest partner (1,192,766) (1,081,741)
Capital distributions to minority interest partner (15,003,000) -
Payment of financing costs and mortgage deposits (1,234,842) (1,316,365)
Proceeds from issuance of shares, net of costs 9,723,192 958,990
Dividends paid (18,080,692) (18,503,165)
Purchase of treasury stock (360,191) (1,185,163)
----------- -----------
Net cash (used in) provided by financing activities (16,953,631) 11,047,363
----------- -----------
Net (decrease) increase in cash and cash equivalents (6,012,045) 23,307,977
Cash and cash equivalents, beginning of period 17,673,321 27,147,331
----------- -----------
Cash and cash equivalents, end of period $ 11,661,276 $ 50,455,308
=========== ===========
--continued --
5
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
Noncash investing and financing activities:
a. Net of $1,631,154 held back from proceeds of mortgages by a mortgage
lender to fund certain escrow accounts.
b. In connection with contributing its interest in a tenancy-in-common to a
limited partnership interest which is owned with an affiliate, assets and
liabilities were transferred as follows:
Interest in direct financing lease $ 8,814,224
Mortgage note payable (6,124,363)
Other assets and liabilities, net 340,014
----------
Equity investment $ 3,029,875
==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
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's asset management and performance fees are payable to its Advisor,
W. P. Carey & Co. LLC, each of which is the per annum amount of 1/2 of 1% of
Average Invested Assets, as defined in the Company's Advisory Agreement. The
Company incurred asset management fees of $694,084 and $712,379 for the three
months ended September 30, 2001 and 2002, respectively, and $2,068,251 and
$2,135,304 for the nine months ended September 30, 2001 and 2002, respectively,
with performance fees in like amount. General and administrative expense
reimbursements were $322,489 and $321,207 for the three months ended September
30, 2001 and 2002, respectively, and $967,168 and $975,835 for the nine months
ended September 30, 2001 and 2002, respectively. Fees are payable to the Advisor
in connection with services performed relating to the identification,
evaluation, financing and purchase of properties. In connection with services
performed in refinancing mortgage debt, fees for the nine months ended September
30, 2002 were $148,637.
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceed the greater of 2% of Average Invested
Assets or 25% of Net Income as defined in the Advisory Agreement for any
twelve-month period. If in any year the operating expenses of the Company exceed
these amounts, the Advisor will have an obligation to reimburse the Company for
such excess, subject to certain conditions. If the Independent Directors find
that such expenses were justified based on any unusual and nonrecurring factors,
the Advisor may be reimbursed in future years for the full amount or any portion
of such excess expenses, but only the extent that such reimbursement would not
cause the Company's operating expenses to exceed this limit in any such year.
Note 3. Mortgage Financing Through Loan Securitization:
On August 28, 2002, The Company and three affiliates, W.P. Carey & Co. LLC ("W.
P. Carey"), Carey Institutional Properties Incorporated ("CIP(R)") and Corporate
Property Associates 14 Incorporated ("CPA(R):14") obtained an aggregate of
approximately $172,335,000 of limited recourse mortgage financing collateralized
by 62 leased properties. The lender pooled the loans into a trust, Carey
Commercial Mortgage Trust, a non-affiliate, whose sole assets consist solely of
the loans, and sold interests in the trust as collateralized mortgage
obligations in a private placement to institutional investors (the "Offered
Interests"). The Company and the three affiliates agreed to acquire a separate
class of subordinated interests in the trust (the "CPA(R) Interests"). The
amount of CPA(R) Interests acquired by the Company was proportional to the
mortgage amounts obtained.
All of the mortgage loans provide for payments of principal and interest at an
annual rate of 7.5% and are based on a 25-year amortization schedule. Each loan
is collateralized by mortgages on the properties and lease assignments. Under
the lease assignments, the lessees direct their rent payment to the mortgage
servicing company which in turn distributes amounts in excess of debt service
requirements to the applicable lessors. Under certain limited conditions, a
property may be released from its mortgage by the substitution of another
property. Such substitution is subject to the approval of the trustee of the
trust.
7
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
The Offered Interests consist of $148,206,000 of the mortgage loan balances,
with different tranches of principal entitled to distributions at annual
interest rates as follows: $119,772,000 - 5.97%, $9,478,000 - 6.58%, $9,478,000
- - 7.18% and $9,478,000 - 8.43%. The assumed final distribution dates for the
four classes of Offered Interests range from December 2011 through March 2012.
The CPA(R) Interests were purchased for $24,128,739 of which the Company's share
was $7,238,622, or 30%, and are comprised of two components, a component that
will receive payments of principal and interest and a component that will
receive payments of interest only. The CPA(R) Interests are subordinated to the
Offered Interests and will be payable only when and if all distributions to the
Offered Interests are current. The assumed final distribution date for the
CPA(R) Interests is June 30, 2012. The distributions to be paid to the CPA(R)
Interests do not have a stated rate of interest and will be affected by any
shortfall in rents received from lessees or defaults at the mortgaged
properties. As of the purchase date, the Company's cost basis attributable to
the principal and interest and interest only components was $4,334,840 and
$2,903,782, respectively. Over the term of its ownership interest in the CPA(R)
Interests, the value of the interest only component will fully amortize to $0
and the principal and interest component will amortize to its anticipated face
value of its share in the underlying mortgages (which currently is $7,238,622).
For financial reporting purposes, the effect of such amortization will be
reflected in interest income. Interest income, including all related
amortization, will be recognized using an effective interest method. As of
September 30, 2002 the Company owned $1,343,400 of Offered Interests which the
Company intends to sell.
The Company is accounting for its interest in the CPA(R) Interests as an
available-for-sale security and will be measured at fair value with all gains
and losses from changes in fair value reported as a component of other
comprehensive income as part of shareholders' equity. As of September 30, 2002,
the fair value of the Company's CPA(R) Interests was $7,231,495, reflecting an
unrealized loss of $3,148. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. The Offered Interests held by
the Company and the three affiliates are being accounted for as trading
securities, with any unrealized gains or losses included in the determination of
net income.
The Company obtained new mortgage financing of $46,335,000 of which $8,908,000
was used to pay off existing loans. In connection with paying off the loans, the
Company incurred prepayment charges of $1,225,000. After paying off the loans,
incurring costs in connection with obtaining the new mortgages and purchasing
its interests in the trust for $8,582,022, the Company retained cash of
approximately $26,400,000, which includes a capital distribution from an equity
investee that refinanced its loan in connection with the transaction. The loans
which were paid off bore interest at annual rates ranging from 8.19% to 8.92%.
The loans obtained are collateralized by real estate with a carrying value of
$66,037,082, and were as follows:
Lease Obligor Loan Amount Annual Debt Service Maturity Date
- ------------- ----------- ------------------- -------------
Silgan Companies Corporation $ 7,236,811 $ 641,753 August 2012
Childtime Childcare, Inc. 6,871,863 609,390 March 2012
Randall International Inc. 5,549,909 492,160 September 2010
Garden Ridge Corporation 5,510,978 488,708 December 2010
Rheometric Scientific, Inc. 5,426,070 481,178 December 2011
Rave Reviews Cinemas L.L.C. 4,399,119 390,109 May 2012
Q Clubs, Inc. 4,330,319 384,008 April 2011
Sentry Technologies Corporation 3,282,994 291,132 August 2011
Celadon Group, Inc. 2,100,683 186,284 May 2011
Compass Bank for Savings 1,626,518 144,238 February 2012
---------- ---------
$46,335,264 $4,108,960
========== =========
The loans paid off were as follows:
Lease Obligor Loan Amount Annual Debt Service
- ------------- ----------- -------------------
Childtime Childcare, Inc. $4,677,496 $492,204
Garden Ridge Corporation 4,230,699 452,699
--------- -------
$8,908,195 $944,903
========= =======
8
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
The Company jointly-owns a 45% interest in two properties leased to ShopRite
Supermarkets, Inc. (formerly Big V Holding Corp.) with CIP(R). In connection
with structuring the transaction, the jointly-owned properties were contributed
to limited partnerships with CIP(R) owning a 55% interest as general partner.
Accordingly, the Company's interest in the limited partnership is accounted for
under the equity method of accounting. The limited partnership obtained new
mortgage financing of $10,890,000 in connection with the securitization with an
annual interest rate of 7.5% and paid off an existing loan of $6,721,103 with an
annual interest rate of 9%. Net of the costs of paying off the existing mortgage
loan, approximately $1,710,000 was distributed to the Company from the limited
partnership. In connection with paying off the existing loan, the limited
partnership incurred a prepayment charge of $419,200, of which the Company's
share of the charge is $188,640. This prepayment has been recognized as an
extraordinary charge.
Note 4. 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 for the nine-month periods ended September 30, 2001 and 2002
are as follows:
2001 2002
---- ----
Per Statements of Income:
Rental income from operating leases $30,090,982 $30,204,432
Interest from direct financing leases 3,895,850 3,722,231
Adjustment:
Share of leasing revenue applicable to minority interest (2,296,359) (2,324,636)
Share of leasing revenue from equity investments 9,351,869 12,074,119
---------- ----------
$41,042,342 $43,676,146
========== ==========
For the nine-month periods ended September 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) $ 4,665,229 11% $ 4,718,086 11%
Advanced Micro Devices, Inc. (b) 2,286,375 6 2,444,203 6
Galyan's Trading Company 2,049,865 5 2,049,865 5
Perry Graphic Communications, Inc. and Judd's Incorporated 1,643,675 4 1,643,675 4
Scott Companies Inc. 1,546,711 4 1,546,711 4
Spectrian Corporation 1,511,641 4 1,522,633 3
Special Devices, Inc. (b) 628,467 2 1,471,500 3
Westell Technologies, Inc. 1,437,289 4 1,437,289 3
Best Buy Co., Inc. (b) 1,322,134 3 1,314,006 3
Career Education Corporation 1,302,606 3 1,302,606 3
Telos Corporation 1,157,443 3 1,218,584 3
Q Clubs, Inc. 1,086,364 3 1,154,523 3
PPD Development, Inc. 1,043,786 3 1,128,142 3
Sicor, Inc. (b) 1,104,552 3 1,104,552 3
The Upper Deck Company (b) 1,056,079 3 1,089,165 2
McLane Company, Inc. (b) 1,038,179 2 1,044,231 2
Compucom Systems, Inc. (b) 978,500 2 1,030,188 2
The Bon-Ton Stores, Inc. 1,011,091 2 1,011,091 2
Del Monte Corporation (c) 1,007,388 2 1,012,553 2
Silgan Containers Corporation 956,250 2 992,838 2
Jen-Coat, Inc. 154,611 - 907,500 2
Textron, Inc. (b) 853,031 2 912,743 2
Childtime Childcare, Inc. 892,555 2 892,555 2
ShopRite Supermarkets, Inc. (formerly Big V Holding Corp.) (d) 805,433 2 811,588 2
Orbseal LLC 8,434 - 758,813 2
9
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
(continued) 2001 % 2002 %
---- - ---- -
Pacific Logistics, L.P. 698,062 2 752,443 2
Garden Ridge Corporation 746,823 2 746,823 2
BAE Systems, Inc. 794,312 2 - -
The Garden Companies, Inc. 690,219 2 690,219 2
Rheometric Scientific, Inc. 658,332 2 672,799 2
Other 5,906,906 13 6,294,222 13
---------- --- ---------- ---
$41,042,342 100% $43,676,146 100%
========== === ========== ===
(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) Includes the Company's proportionate share of lease revenues from its
equity investment for the period subsequent to September 30, 2001.
(d) Includes the Company's proportionate share of lease revenues from its
equity investment for the period subsequent to July 31, 2002.
Note 5. 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. ("Best Buy"), 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, Special Devices, Inc and
ShopRite Supermarkets, Inc. ("ShopRite"). The limited partnership interest in
the ShopRite properties resulted from contributing the Company's 45%
tenancy-in-common interest to a limited partnership in August 2002 (also see
Note 3).
Summarized financial information of the Company's equity investees is as
follows:
(In thousands) December 31, 2001 September 30, 2002
----------------- ------------------
Assets (primarily real estate) $353,674 $369,939
Liabilities (primarily mortgage notes payable) 225,827 235,371
Partners' and members' equity 127,847 134,568
Nine Months Ended September 30,
-------------------------------
2001 2002
---- ----
Revenues (primarily rental revenue) $ 23,536 $ 29,452
Expenses (primarily interest on mortgages and
depreciation) (15,029) (17,022)
------- -------
Income before extraordinary charge 8,507 12,430
Extraordinary charge - (2,506)
------- -------
Net income $ 8,507 $ 9,924
======= =======
In February 2002, the Best Buy general partnership paid off a mortgage loan of
$25,743,178 and incurred an extraordinary charge on the early extinguishment of
debt of $2,086,384, of which the Company's share was $771,962.
Note 6. Accounting Pronouncements:
In June 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.
10
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
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 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 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for
the acquisitions of certain financial institutions and includes long-term
customer relationships as intangible assets within the scope of SFAS No. 144.
The Company does not expect SFAS No. 147 to have a material effect on its
financial statements.
11
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 September 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. For its
direct financing leases, CPA(R):12 is required to perform a review of residual
values at least annually.
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.
12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CPA(R):12 is accounting for its subordinated interest in a mortgage trust as an
available-for-sale security with all changes in fair value reported as a
component of other comprehensive income as part of shareholders' equity. Fair
value is determined using a discounted cash flow model with assumptions of
market rates and the underlying credit quality of lessees.
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 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 nine months ended September 30, 2002
decreased by $2,418,000 and $12,704,000, respectively, as compared with the
three months and nine months ended September 30, 2001. Net of the effect of
unrealized gains and losses on warrants, a realized gain on the sale of a
property in 2001 and extraordinary charges on early extinguishment of debt in
2002, income would have reflected increases of $610,000 and $967,000 for the
comparable three-month and nine-month periods. The increases in income before
gains and losses and extraordinary charges were primarily due to an increase in
income from equity investments and a decrease in general and administrative
expenses which were partially offset by increases in interest expense and
property expense. A portion of the increase in income from equity investments
was due to the reclassification of certain investments to the equity method in
connection with contributing interests into limited partnerships owned with
affiliates. The change in ownership was a requirement for obtaining new mortgage
financing.
Equity income increased primarily due to the acquisition of properties in June
2001 leased to Special Devices, Inc. and the re-leasing in August 2001 of a
property in Grand Rapids, Michigan. In addition, equity income benefited from
rent increases from four leases for properties accounted for as equity
investments. Of the $1,679,000 increase in equity income for the comparable
nine-month periods, $314,000 was due to acquisition of the interest in Special
Devices properties, $460,000 was due to the re-leasing of the Grand Rapids
property and approximately $275,000 was due to the rent increases. In connection
with changes in the form of ownership of jointly-held investments, interests in
properties net leased to the Del Monte Corporation and ShopRite Supermarkets,
Inc. were reclassified as equity investments in the fourth quarter of 2001 and
the third quarter of 2002, respectively. Prior to the reclassification, the
results of operations reflect the pro-rata share of revenues and expenses from
these investments; however, the reclassification had no effect on net income.
For the nine-month period ended September 30, 2002, the Del Monte and ShopRite
interests contributed $547,000 to equity income.
Lease revenues (rental revenues and interest income from direct financing
leases) decreased by $68,000 and $60,000 for the comparable three-month and
nine-month periods as a result of the reclassification of the investment in the
Del Monte and ShopRite properties. Net of the effect of the Del Monte and
ShopRite reclassifications, lease revenues for the three and nine months
increased $475,000 and $1,122,000, respectively, primarily as a result of the
acquisition of properties leased to Orbseal LLC and Jen-Coat, Inc. in the third
quarter of 2001 and to a lesser extent, scheduled rent increases on existing
leases. Lease revenues for the comparable nine month periods reflect a reduction
of $794,000 following the May 2001 sale of a property formerly leased to BAE
Systems, Inc. Funds from the BAE property sale were used to acquire the Orbseal
and Jen-Coat properties as well as the equity interest in the Special Devices
properties.
Interest expense for the three-month and nine-month periods increased by
$396,000 and $269,000, respectively, primarily due to the placement of debt
since June 2001. Interest expense for the prior nine-month periods included
approximately $100,000 of interest from an advance on the Company's credit
facility as well as $443,000 of interest on a loan on the Del Monte properties
which is now reflected in equity income. Interest incurred on previously
13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
unencumbered properties included in the mortgage securitization was
approximately $225,000 from August 28, 2002, the date of the placement of the
mortgages, through September 30, 2002.
General and administrative expense decreased primarily as a result of a charge
in 2001 for expensing costs of $255,000 which had previously been capitalized in
connection with proposed acquisitions. The capitalized costs were written off
when the proposed acquisitions were not completed. Property expense increased
due to an increase in CPA(R):12's provision for uncollected rents. The provision
is generally based on a percentage of rents and an evaluation of specific
circumstances which could indicate the need to strengthen existing reserve
balances. In July 2002 and October 2002, CPA(R):12 negotiated lease
modifications with Randall International, Inc. and International Management
Consulting, Inc., respectively. Both the Randall and IMCI lease amendments
provide for a short-term deferral of rent and establish a schedule to
systematically pay off rent arrearages with interest. To the extent that Randall
and IMCI successfully restructure, the deferrals will not have a long-term
effect on operating cash flow. Stated annual rents from Randall and IMCI are
$849,000 and $824,000, respectively. Under the Randall agreement, Randall has
granted CPA(R):12 warrants which are convertible into a 5% interest in the
company.
As a result of obtaining $46,335,000 of new mortgage debt, interest expense will
increase substantially. CPA(R):12 will use net proceeds from the mortgage
transaction to acquire additional real estate interests. Additionally, with the
acquisition of interests in the mortgage trust, CPA(R):12's interest income will
increase substantially. Prior to this transaction, CPA(R):12's interest income
represented amounts earned in investing cash in money market instruments.
Management projects that the effective rate of interest on the mortgages
obtained through the securitization, net of the projected cash flow from the
interest in the mortgage trust, will be approximately 6.25%.
FINANCIAL CONDITION:
Since December 31, 2001, CPA(R):12's cash and cash equivalents have increased by
$23,308,000 primarily as a result of obtaining new mortgage financing in
connection with the mortgage securitization described below. As of September 30,
2002, CPA(R):12 has $50,455,000 in cash and cash equivalents. CPA(R):12 intends
to use these funds, except for amounts needed to meet working capital needs, to
acquire new properties to further diversity its portfolio.
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 of $20,561,000 included $1,225,000 of prepayment premiums. Cash
flow from continuing operations of $21,786,000 and equity investments of
$953,000 were sufficient to pay dividends of $18,503,000 and distributions of
$1,082,000 to minority interest partners, but were not sufficient to fully cover
debt mortgage principal installments of $3,621,000, resulting in a shortfall of
$467,000.
CPA(R):12 invests its cash in conservative, low-yielding money market
investments until suitable real estate investments have been selected. 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.
Operating cash flow should also benefit from CPA(R):12's investment in the
mortgage trust.
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 using $8,582,000 to purchase interests
in the mortgage loan pool. In January, CPA(R):12 paid its annual installment to
its Advisor of $1,376,000 for deferred acquisition fees, and has funded a
$903,000 expansion at an existing facility leased to Celadon Group, Inc. The
Celadon expansion was completed in
14
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
May 2002 and resulted in 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.
The mortgage pool consists solely of $172,335,000 of newly-issued mortgage loans
collateralized by properties and lease assignments on properties owned by
CPA(R):12 and three affiliates. Interests representing $148,206,000 of the
securitized mortgage assets were offered to institutional investors and
subordinated interests of $24,129,000 were purchased by CPA(R):12 and its
affiliates. As of September 30, 2002, CPA(R):12 owned approximately $7,239,000
of the subordinated interests and $1,343,000 of the offered interests. CPA(R):12
intends to sell its remaining offered interest. The subordinated interests are
payable only after all other classes of ownership receive their stated interest
and, therefore, will be affected by any defaults or nonpayments of rents by
lessees at the mortgaged properties, regardless of which affiliate owns the
underlying property. CPA(R):12's cash flow, therefore, may be affected by events
that occur at affiliates and not only from its own properties. To the extent
that there are no defaults or nonpayments, CPA(R):12 may realize up to
$1,075,000 in annual cash flow from its subordinated interest. Because the
subordinated interests incur any losses before the other interests, the risk of
a loss in cash flow and market value of the investment is greatest for this
interest, and there is no assurance that there will be no adverse events that
would significantly diminish cash flow from this investment.
In addition to the payment of dividends to shareholders, distributions to
minority partners and scheduled principal payments on mortgage debt, CPA(R):12's
financing activities include $44,704,000 of new mortgage proceeds that were
received in connection with the financing of the mortgage pool, of which
$8,908,000 was used to pay off two mortgage loans which were refinanced. As a
result of placing loans in the mortgage pool, CPA(R):12 was able to obtain
favorable terms (7.5% annual interest on a 25-year amortization schedule) on
supermarkets, movie theaters and a health club, properties which traditional
corporate mortgage lenders are currently financing at higher annual interest
rates. CPA(R):12 and its affiliates believe they have found an additional,
non-traditional source of financing mortgage debt and may seek to obtain
additional limited recourse mortgages through a mortgage securitization in the
future. There are no current plans to obtain additional financing through a
securitization of loans. All of the loans are limited recourse loans and have
maturity dates ranging from September 2010 to May 2012, at which time balloon
payments are scheduled. Annual debt service payments will increase by
$3,164,000. CPA(R):12 has a $20,000,000 credit facility available to it for
investment opportunities and potential liquidity needs. As of September 30, 2002
there were no amounts outstanding under the credit facility. CPA(R):12 used
$10,000,000 from the credit facility in January 2002 to pay off a mortgage loan
on properties leased to Best Buy Co., Inc. which, in turn, was paid off from
proceeds received from the Best Buy refinancing. 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. A mortgage loan collateralized by a property leased to Telos Corporation
is scheduled to mature in March 2013. As of September 30, 2002, the outstanding
balance on the Telos mortgage loan is $5,251,000. CPA(R):12 has sufficient
resources to pay off the loan; however, it will likely seek to refinance it.
A summary of CPA(R):12's contractual obligations and commitments as of September
30, 2002 is as follows:
(in thousands) Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage
notes payable $196,294 $1,354 $10,735 $5,936 $10,425 $11,517 $156,327
Deferred acquisition fees 5,861 1,277 1,289 1,161 963 1,171
Subordinated disposition fees 1,376 1,376
Commitments:
Share of minimum rents
payable under office cost-
sharing agreement 819 47 206 206 206 154 -
------- ----- ------ ----- ------ ------ -------
$204,350 $1,401 $12,218 $7,431 $11,792 $12,634 $158,874
======= ===== ====== ===== ====== ====== =======
In June 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
15
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships
as intangible assets within the scope of SFAS No. 144. CPA(R):12 does not
expect SFAS No. 147 to have a material effect on its financial statements.
16
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.
CPA(R):12 owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuation based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of September
30, 2002 the interests in CCMT had a fair value of $8,574,895, which
approximates cost .
Approximately $191,043,000 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 September 30, 2002 ranged from 6.50% to 9%.
The interest rate on the variable rate debt as of September 30, 2002 was 5.32%.
There has been no material change since December 31, 2001.
(in thousands) 2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $1,315 $5,523 $5,936 $10,425 $11,517 $156,327 $191,043 $197,195
Average interest
rate 7.44% 7.44% 7.44% 7.45% 7.77% 7.52%
Variable rate
debt $ 39 $5,212 $ 5,251 $ 5,251
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
September 30, 2002.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its co-chief executive officers and chief
financial officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's co-chief executive officers and chief
financial officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
17
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2002, no matters were submitted
to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended September 30, 2002, CPA(R):12 was not
required to file any reports on Form 8-K.
18
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
11/12/2002 By: /s/ John J. Park
------------ ----------------------------------------
Date John J. Park
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
11/12/2002 By: /s/ Claude Fernandez
------------ ----------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
19
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 12 Incorporated (the "Registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and we have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002 Date 11/11/2002
--------------------------- --------------------------
/s/ William Polk Carey /s/ Gordon F. Dugan
--------------------------- --------------------------
William Polk Carey Gordon F. DuGan
Chairman Vice Chairman
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
20
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 12 Incorporated (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002
/s/ John J. Park
---------------------------
John J. Park
Chief Financial Officer
21