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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 033-68728
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3726306
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|.
Registrant has no active market for its common stock as of March 20, 2003.
Non-affiliates held 28,755,385 shares as of March 25, 2003.
As of March 25, 2003, there are 30,101,349 shares of common stock of Registrant
outstanding.
CPA(R):12 incorporates by reference its definitive Proxy Statement with
respect to its 2003 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
PART I
Item 1. Business.
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Corporate Property Associates 12 ("CPA(R):12") Incorporated is a real estate
investment trust ("REIT") that acquires and owns commercial properties leased to
companies nationwide, primarily on a triple net basis. As of December 31, 2002,
CPA(R):12's portfolio consisted of 97 properties leased to 42 tenants and
totaling more than 10.2 million square feet.
CPA(R):12's core investment strategy is to own and manage its portfolio of
properties leased to a variety of companies on a single tenant net lease basis,
to maximize shareholder returns. Additional properties may be bought and net
leased if appropriate opportunities arise. These leases generally place the
economic burden of ownership on the tenant by requiring them to pay the costs of
maintenance, insurance, taxes, structural repairs and other operating expenses.
CPA(R):12 also generally includes in its leases:
- clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index or other
indices or, when appropriate, increases tied to the volume of sales
at the property;
- covenants restricting the activity of the tenant to reduce the risk
of a change in credit quality;
- indemnification of CPA(R):12 for environmental and other
liabilities; and
- guarantees from parent companies or other entities.
CPA(R):12 was formed as a Maryland corporation on July 30, 1993. Between
February 1994 and September 1997, CPA(R):12 sold a total of 28,334,451 shares of
common stock for a total of $283,344,510 in offering proceeds. CPA(R):12 also
raised an additional $10,000,000 through a private placement of its common stock
in January 2001. These proceeds have been combined with limited recourse
mortgage debt to purchase CPA(R):12's property portfolio. As a REIT, CPA(R):12
is not subject to federal income taxation as long as it satisfies certain
requirements relating to the nature of its income, the level of its
distributions and other factors.
Carey Asset Management Corp. provides both strategic and day-to-day management
for CPA(R):12, including acquisition services, research, investment analysis,
asset management, capital funding services, disposition of assets, investor
relations and administrative services. Carey Asset Management Corp. also
provides office space and other facilities for CPA(R):12. Carey Asset Management
Corp. has dedicated senior executives in each area of its organization so that
CPA(R):12 functions as a fully integrated operating company. CPA(R):12 pays
asset management fees to Carey Asset Management Corp., pays certain
transactional fees and also reimburses Carey Asset Management Corp. for certain
expenses. Carey Asset Management Corp. also serves in this capacity for Carey
Institutional Properties Incorporated ("CIP"), Corporate Property Associates 14
Incorporated ("CPA(R):14") and Corporate Property Associates 15 Incorporated
("CPA(R):15"). Carey Asset Management Corp. is a wholly-owned subsidiary of W.
P. Carey & Co. LLC, a publicly-traded company on the New York Stock Exchange and
Pacific Exchange under the symbol "WPC."
CPA(R):12's principal executive offices are located at 50 Rockefeller Plaza, New
York, NY 10020 and its telephone number is (212) 492-1100. As of December 31,
2002, CPA(R):12 had no employees. An affiliate of Carey Asset Management Corp.
employs 27 individuals who perform services for CPA(R):12. CPA(R):12's website
address is http://www.CPA12.com.
BUSINESS OBJECTIVES AND STRATEGY
CPA(R):12's objectives are to:
- pay quarterly dividends at an increasing rate that for taxable
shareholders are partially free from current taxation;
- provide inflation protected income;
- purchase and own a diversified portfolio of net-leased real estate
that will increase in value; and increase the value of its shares by
increasing the equity in its real estate by making regular mortgage
principal payments.
-1-
CPA(R):12 seeks to achieve these objectives by purchasing and holding industrial
and commercial properties each net leased to a single corporate tenant.
CPA(R):12 intends its portfolio to be diversified by geography, property type
and by tenant.
DEVELOPMENTS DURING 2002
CPA(R):12 owns a 37% interest in a partnership which leases properties to Best
Buy Co., Inc. The remaining 63% is owned by CIP(R). In February 2002, the Best
Buy partnership paid off an existing limited recourse mortgage loan of
$25,743,178. The retired loan provided for monthly payments of interest and
principal of $291,290 at an annual interest rate of 9.01%. The 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.
On August 28, 2002, CPA(R):12 and three affiliates, W. P. Carey & Co. LLC,
CIP(R) and 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. CPA(R):12 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 CPA(R):12 was proportional to the
mortgage amounts obtained. CPA(R):12 obtained new mortgage financing proceeds in
this transaction of $46,335,264. The CPA(R) Interests were purchased for
$24,128,739 of which CPA(R):12's share was $7,238,622, or 30%.
The loans obtained 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 above 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. Balloon
payments are due on the maturity dates.
The loans paid off were as follows:
Annual Debt
Lease Obligor Loan Amount Service Interest Rate
- ------------- ----------- ------- -------------
Childtime Childcare, Inc. $4,677,496 $492,204 8.19%
Garden Ridge Corporation 4,230,699 452,699 8.72%
---------- --------
$8,908,195 $944,903
========== ========
On December 26, 2002, CPA(R):12, CPA(R):14, CPA(R):15, formed three newly formed
limited partnerships with ownership interests of 15%, 35% and 50% respectively,
which purchased land and seven buildings located in Kingman, Arizona; Woodland,
California; Jonesboro, Georgia; Kansas City, Missouri; Springfield, Oregon;
Fogelsville, Pennsylvania and Corsicana, Texas for $131,678,450, and entered
into three master net leases with TruServ Corporation. The leases have initial
terms of 20 years followed by one renewal term of nine years and 11 months and a
second renewal term of 10 years. The leases provide for aggregate initial rent
of $12,007,151, with stated annual increases. In connection with the purchase of
the properties, the limited partnerships obtained limited recourse mortgage
loans totaling $76,654,821 (including $27,550,047 obtained in January 2003),
collateralized by
-2-
deeds of trust on the properties, and lease assignments. The loans provide for
aggregate monthly payments of interest and principal of $451,134, at an annual
interest rate of 5.83% based on 30-year amortization schedules. The loans mature
in January and February 2013 at which time balloon payments are scheduled.
In October 2002, CPA(R):12 and Rheometric entered into an agreement that would
allow Rheometric to terminate its lease for its facility in Piscataway, New
Jersey upon completion of an asset sale of one of its lines of business. On
January 16, 2003, Rheometric completed the sale of its rheology instruments
business to the Waters Corporation at which time the lease termination ageement
became effective. In connection with the sale of the business to Waters,
Rheometric changed its name to Proterion Corporation. Under the agreement,
CPA(R):12 received a payment of $2,250,000 (all of which is held in escrow by
the mortgage lender) and $256,315 which had been held by CPA(R):12 from a sale
of excess land at the Piscataway property and which was to be released to
Rheometric upon satisfaction of certain conditions was retained. The termination
agreement also provides for two payments to CPA(R):12 totaling up to $750,000
over the next year. In addition, the exercise price for warrants for 466,140
shares of Rheometric common stock was reduced from $2.00 to $.01 per share and
were concurrently converted to 456,424 shares of common stock pursuant to a
cashless exercise. CPA(R):12 has the right to sell such shares at any time.
CPA(R):12 also received an additional 650,000 shares of Rheometric common stock,
the sale of which is subject to certain restrictions. As of March 12, 2003, the
per share closing price of Proterion Corporation was $0.30.
On February 7, 2003, CPA(R):12, CPA(R):14 and CPA(R):15, through a newly-formed
limited liability company with ownership interests of 15%, 41% and 44%,
respectively purchased land and 15 health club facilities for $178,010,471 and
entered into a master net lease with Starmark Camhood, L.L.C. The lease
obligations of Starmark are jointly unconditionally guaranteed by seven of its
affiliates. The Starmark lease provides for an initial lease term of 20 years
with three ten-year renewal terms. Annual rent is initially $18,272,400 with
CPI-based increases scheduled in November 2006, 2010, 2014, 2018 and 2021.
$167,400 of annual rent will not be included in the determination of the future
rent increases. In connection with the purchase, the limited liability company
obtained first mortgage limited recourse financing of $88,300,000 and a
mezzanine loan of $20,000,000. The first mortgage provides for monthly payments
of interest and principal of $563,936 at an annual interest rate of 6.6% and
based on a 30-year amortization schedule. The loan matures in March 2013 at
which time a balloon payment is scheduled. The mezzanine loan provides for
monthly payments of interest and principal of $277,201 at an annual interest
rate of 11.15% and will fully amortize over its ten-year term. The limited
liability company was granted 5,276 warrants for Class C Unit interests in
Starmark and which represent a 5% interest in the company. The warrants which
may be exercised at any time through February 7, 2023 at an exercise price of
$430 per unit. The warrant agreement does not provide for a net settlement.
On March 12, 2003, CPA(R):12 purchased a 35% interest in a limited liability
company from CPA(R):15. The limited liability company that owns properties
leased to Medica-France and affiliates of Carrefour S.A. The purchase price for
the 35% interest consisted of a payment of $11,916,465 and the assumption of a
deferred fee payable to the Advisor of $1,031,046. The purchase price was based
on the appraised value of the properties (based on the current exchange rate for
the Euro) adjusted for capital costs incurred since the acquisition by CPA(R):15
including fees paid to the Advisor, net of mortgage debt. Based on the current
exchange rate for the Euro, the value used for Medica and Carrefour properties
as of the date of the purchase of the 35% interests was $47,218,481 and
$119,358,007, respectively, inclusive of fees. The Medica leases have a
remaining term through June 2011 and provide for aggregate annual rent of Euro
3,856,618 ($4,226,467 based on the current exchange rate) with annual rent
increases based on a formula indexed to increases in the INSEE, a French
construction cost index. The Carrefour leases have a remaining term through
December 2011 at an aggregate annual rent of Euro 10,190,269 ($11,167,516) with
annual rent increases based on a formula, indexed to the INSEE, a French
construction cost index. In connection with the purchase of the properties, the
limited liability company obtained limited recourse mortgage debt of Euro
34,000,000 ($37,260,600) and Euro 84,244,000 ($92,323,000) on the Medica and
Carrefour properties, respectively. The Medica and Carrefour loans provide for
quarterly payments of interest at an annual interest rate of 5.631% and 5.55%,
respectively, and stated principal payments with scheduled increases over their
terms. The Medica and Carrefour loans mature in October 2017 and December 2014,
respectively, at which time balloon payments are scheduled.
-3-
ACQUISITION STRATEGIES
Carey Asset Management Corp. has a well-developed process with established
procedures and systems for acquiring net leased property on behalf of CPA(R):12.
As a result of its reputation and experience in the industry and the contacts
maintained by its professionals, Carey Asset Management Corp. has a presence in
the net lease market that has provided it with the opportunity to invest in a
significant number of transactions on an ongoing basis. CPA(R):12 takes
advantage of Carey Asset Management Corp.'s presence in the net lease market to
build its portfolio. In evaluating opportunities for CPA(R):12, Carey Asset
Management Corp. carefully examines the credit, management and other attributes
of the tenant and the importance of the property under consideration to the
tenant's operations. Careful credit analysis is a crucial aspect of every
transaction. CPA(R):12 believes that Carey Asset Management Corp. has one of the
most extensive underwriting processes in the industry and has an experienced
staff of professionals involved with underwriting transactions. Carey Asset
Management Corp. seeks to identify those prospective tenants whose
creditworthiness is likely to improve over time. CPA(R):12 believes that the
experience of Carey Asset Management Corp.'s management in structuring
sale-leaseback transactions to meet the needs of a prospective tenant enables
Carey Asset Management Corp. to obtain a higher return for a given level of risk
than would typically be available by purchasing a property subject to an
existing lease.
Carey Asset Management Corp.'s strategy in structuring its net lease investments
for CPA(R):12 is to:
- combine the stability and security of long-term lease payments,
including rent increases, with the appreciation potential inherent
in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type of
facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements from the
tenant when possible, such as warrants to purchase tenant common
stock. As of December 31, 2002, CPA(R):12 held warrant positions in
four tenants.
FINANCING STRATEGIES
Consistent with its investment policies, CPA(R):12 uses leverage when available
on favorable terms. CPA(R):12 has approximately $194,934,000 in property level
debt outstanding. These mortgages mature between 2003 and 2020 and have interest
rates between 5.64% and 8.75%. CPA(R):12 also has available to it a $20,000,000
credit facility, as discussed above, with no outstanding balance as of December
31, 2002.
Carey Asset Management Corp. continually seeks opportunities and considers
alternative financing techniques to finance properties not currently subject to
debt, refinance debt, reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, Carey Asset Management Corp. reviews and
structures many aspects of a transaction, including the tenant, the real estate
and the lease, to determine whether a potential acquisition can be structured to
satisfy CPA(R):12's acquisition criteria. The aspects of a transaction which are
reviewed and structured by Carey Asset Management Corp. include the following:
Tenant Evaluation. Carey Asset Management Corp. subjects each potential
tenant to an extensive evaluation of its credit, management, position
within its industry, operating history and profitability. Carey Asset
Management Corp. seeks tenants it believes will have stable or improving
credit. By leasing properties to these types of tenants, CPA(R):12 can
generally charge rent that is higher than the rent charged to tenants
with recognized credit and, thereby, enhance its current return from
these properties as compared with properties leased to companies whose
credit potential has already been recognized by the market. Furthermore,
if a tenant's credit does improve, the value of CPA(R):12's properties
leased to that tenant will likely increase (if all other factors
affecting value remain unchanged). Carey Asset Management Corp. may also
seek to enhance the likelihood of a tenant's lease obligations being
satisfied, such as through a letter of credit or a guaranty of lease
obligations from the tenant's corporate parent. This credit enhancement
provides CPA(R):12 with additional financial security.
Leases with Increasing Rents. Carey Asset Management Corp. seeks to
include clauses in CPA(R):12's leases that provide for increases in rent
over the term of the leases. These increases are generally tied to
increases in
-4-
certain indices such as the consumer price index, in the case of retail
stores, participation in gross sales above a stated level, mandated
rental increases on specific dates and through other methods. CPA(R):12
seeks to avoid entering into leases that provide for contractual
reductions in rents during their primary term (other than reductions
related to reductions in debt service).
Properties Important to Tenant Operations. Carey Asset Management Corp.,
on behalf of CPA(R):12, generally seeks to acquire properties with
operations that are essential or important to the ongoing operations of
the tenant. CPA(R):12 believes that these properties provide better
protection in the event that tenants file for bankruptcy, because leases
on properties essential or important to the operations of a bankrupt
tenant are less likely to be rejected and terminated by a bankrupt
tenant. Carey Asset Management Corp. also seeks to assess the income,
cash flow and profitability of the business conducted at the property,
so that, if the tenant is unable to operate its business, CPA(R):12 can
either continue operating the business conducted at the property or
re-lease the property to another entity in the industry which can
operate the property profitably.
Lease Provisions that Enhance and Protect Value. When appropriate, Carey
Asset Management Corp. attempts to include provisions in CPA(R):12's
leases that require CPA(R):12's consent to certain tenant activity or
require the tenant to satisfy certain operating tests. These provisions
include, for example, operational and financial covenants of the tenant,
prohibitions on a change in control of the tenant and indemnification
from the tenant against environmental and other contingent liabilities.
Including these provisions in its leases enables CPA(R):12 to protect
its investment from changes in the operating and financial
characteristics of a tenant that may impact its ability to satisfy its
obligations to CPA(R):12 or could reduce the value of CPA(R):12's
properties.
Diversification. Carey Asset Management Corp. tries to diversify
CPA(R):12's portfolio of properties to avoid dependence on any one
particular tenant, type of facility, geographic location and tenant
industry. By diversifying its portfolio, CPA(R):12 reduces the adverse
effect on CPA(R):12 of a single under-performing investment or a
downturn in any particular industry or geographic location.
Carey Asset Management Corp. employs a variety of other strategies and practices
in connection with CPA(R):12's acquisitions. These strategies include attempting
to obtain equity enhancements in connection with transactions. Typically, these
equity enhancements involve warrants to purchase stock of the tenant to which
the property is leased or the stock of the parent of the tenant. In certain
instances, CPA(R):12 grants to the tenant a right to purchase the property
leased by the tenant, but generally the option purchase price will be not less
than the fair market value of the property. Carey Asset Management Corp.'s
practices include performing evaluations of the physical condition of properties
and performing environmental surveys in an attempt to determine potential
environmental liabilities associated with a property prior to its acquisition.
As a transaction is structured, it is evaluated by the Chairman of the
Investment Committee with respect to the potential tenant's credit, business
prospects, position within its industry and other characteristics important to
the long-term value of the property and the capability of the tenant to meet its
lease obligations. Before a property is acquired, the transaction is reviewed by
the Investment Committee to ensure that it satisfies CPA(R):12's investment
criteria. Aspects of the transaction that are typically reviewed by the
Investment Committee include the expected financial returns, the
creditworthiness of the tenant, the real estate characteristics and the lease
terms.
The Investment Committee is not directly involved in originating or negotiating
potential acquisitions, but instead functions as a separate and final step in
the acquisition process. Carey Asset Management Corp. places special emphasis on
having experienced individuals serve on its Investment Committee and does not
invest in a transaction unless it is approved by the Investment Committee.
CPA(R):12 believes that the Investment Committee review process gives it a
unique, competitive advantage over other unaffiliated net lease companies
because of the substantial experience and perspective that the Investment
Committee has in evaluating the blend of corporate credit, real estate and lease
terms that combine to make an acceptable risk.
The following people serve on the Investment Committee:
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the
CPA(R) Programs for over 20 years.
-5-
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential
Insurance Company of America. As Chief Investment Officer, Mr.
Hoenemeyer was responsible for all of Prudential's investments,
including stocks, bonds, private placements, real estate and
mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice President
- Head of Bond & Corporate Finance Department of the John
Hancock Mutual Life Insurance Company. His responsibilities
included overseeing $21 billion of Fixed income investments for
Hancock, its affiliates and outside clients.
- Lawrence R. Klein is Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton
School. Dr. Klein has been awarded the Alfred Nobel Memorial
Prize in Economic Sciences and currently advises various
governments and government agencies.
ASSET MANAGEMENT
CPA(R):12 believes that effective management of its net lease assets is
essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
Carey Asset Management Corp. monitors, on an ongoing basis, compliance by
tenants with their lease obligations and other factors that could affect the
financial performance of any of its properties. Monitoring involves receiving
assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the properties it occupies and confirming that appropriate
insurance coverage is being maintained by the tenant. Carey Asset Management
Corp. reviews financial statements of its tenants and undertakes regular
physical inspections of the condition and maintenance of its properties.
Additionally, Carey Asset Management Corp. periodically analyzes each tenant's
financial condition, the industry in which each tenant operates and each
tenant's relative strength in its industry.
HOLDING PERIOD
CPA(R):12 intends to hold each property it acquires for an extended period. The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors with a view to
achieving maximum capital appreciation and after-tax return for the CPA(R):12
shareholders. If CPA(R):12's common stock is not listed for trading on a
national securities exchange or included for quotation on Nasdaq, CPA(R):12's
policy is to generally begin selling properties within ten years after the
proceeds of the public offering are substantially invested, subject to market
conditions. Pursuant to this policy, CPA(R):12's board of directors will begin
considering liquidity alternatives for CPA(R):12 over the course of the next
year or two. The board of directors will make the decision whether to list the
shares, liquidate or devise an alternative liquidity strategy which is likely to
result in the greatest value for the shareholders.
COMPETITION
CPA(R):12 faces competition for the acquisition of office and industrial
properties in general, and such properties net leased to major corporations in
particular, from insurance companies, credit companies, pension funds, private
individuals, investment companies and other REITs. CPA(R):12 also faces
competition from institutions that provide or arrange for other types of
commercial financing through private or public offerings of equity or debt or
traditional bank financings. CPA(R):12 believes its management's experience in
real estate, credit underwriting and transaction structuring will allow
CPA(R):12 to compete effectively for office and industrial properties.
-6-
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. CPA(R):12's leases often
provide that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.
CPA(R):12 typically undertakes an investigation of potential environmental risks
when evaluating an acquisition. Phase I environmental assessments are performed
by independent environmental consulting and engineering firms for all properties
acquired by CPA(R):12. Where warranted, Phase II environmental assessments are
performed. Phase I assessments do not involve subsurface testing, whereas Phase
II assessments involve some degree of soil and/or groundwater testing. CPA(R):12
may acquire a property which is known to have had a release of hazardous
materials in the past, subject to a determination of the level of risk and
potential cost of remediation. CPA(R):12 normally requires property sellers to
indemnify it fully against any environmental problem existing as of the date of
purchase. Additionally, CPA(R):12 often structures its leases to require the
tenant to assume most or all responsibility for compliance with the
environmental provisions of the lease or environmental remediation relating to
the tenant's operations and to provide that non-compliance with environmental
laws is a lease default. In some cases, CPA(R):12 may also require a cash
reserve, a letter of credit or a guarantee from the tenant, the tenant's parent
company or a third party to assure lease compliance and funding of remediation.
The value of any of these protections depends on the amount of the collateral
and/or financial strength of the entity providing the protection. Such a
contractual arrangement does not eliminate CPA(R):12's statutory liability or
preclude claims against CPA(R):12 by governmental authorities or persons who are
not a party to the arrangement. Contractual arrangements in CPA(R):12's leases
may provide a basis for CPA(R):12 to recover from the tenant damages or costs
for which it has been found liable.
INDUSTRY SEGMENT
CPA(R):12 operates in one industry segment, investment in net leased real
property. For the year ended December 31, 2002, Applied Materials, Inc.
represented 11% of the total operating revenue of CPA(R):12. Applied Materials
is publicly traded and files financial information with the United States
Securities and Exchange Commission in accordance with the 1933 and 1934 Acts..
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") became effective in December 1995. The Act provides a "safe harbor" for
companies that make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
CPA(R):12 wishes to take advantage of the "safe harbor" provisions of the Act
and is therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
CPA(R):12's future results may be affected by certain risks and uncertainties
including the following:
We are subject to the risks of real estate ownership which could reduce the
value of our properties.
Our properties may include net leased industrial and commercial property. The
performance of CPA(R):12 is subject to risks incident to the ownership and
operation of these types of properties, including:
- changes in the general economic climate;
- changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
- changes in interest rates and the availability of financing;
-7-
- competition from other available space; and
- changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
We may have difficulty selling or re-leasing our properties.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. Many of the
net leases we enter into or acquire are for properties that are specially suited
to the particular needs of our tenant. With these properties, if the current
lease is terminated or not renewed, we may be required to renovate the property
or to make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, we may have
difficulty selling it to a party other than the tenant due to the special
purpose for which the property may have been designed. In addition, provisions
of the Internal Revenue Code relating to REITs limit our ability to sell
properties held for fewer than four years. These and other limitations may
affect our ability to sell properties without adversely affecting returns to our
shareholders.
The inability of a tenant in a single tenant property to pay rent will reduce
our revenues.
Most of our properties are occupied by a single tenant and, therefore, the
success of our investments are materially dependent on the financial stability
of our tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and cause us
to have to find an alternative source of revenue to meet the mortgage payment
and prevent a foreclosure if the property is subject to a mortgage. In the event
of a default, we may experience delays in enforcing our rights as landlord and
may incur substantial costs in protecting our investment and reletting our
property. If a lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell the property
without incurring a loss.
The bankruptcy of tenants would cause a reduction in revenue. A tenant in
bankruptcy could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms providing for the repurchase of a property by the
tenant, a bankruptcy court could recharacterize a net lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor.
Some of the programs managed by Carey Asset Management Corp. or its affiliates
have had tenants file for bankruptcy protection and are involved in litigation.
Four CPA(R) programs had to reduce the rate of distributions to their partners
as a result of adverse developments involving tenants.
If our tenants are highly leveraged, they may have a higher possibility of
filing for bankruptcy. Of tenants that experience downturns in their operating
results due to adverse changes to their business or economic conditions, those
that are highly leveraged may have a higher possibility of filing for
bankruptcy. In bankruptcy, a tenant has the option of vacating a property
instead of paying rent. Until such a property is released from bankruptcy, our
revenues would be reduced and could cause us to reduce distributions to
shareholders. We have highly leveraged tenants at this time, and we may have
additional highly leveraged tenants in the future.
Our tenants generally do not have a recognized credit rating, which may create a
higher risk of lease defaults and therefore lower revenues than if our tenants
had a recognized credit rating.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose a higher risk of default than would long term leases with tenants
whose credit potential has already been recognized by the market.
-8-
There is not, and may never be a public market for our shares, so it will be
difficult for shareholders to sell shares quickly.
There is no current public market for the shares and, therefore, it will be
difficult for shareholders to sell their shares promptly. In addition, the price
received for any shares sold is likely to be less than the proportionate value
of the real estate we own.
Our success is dependent on the performance of W. P. Carey & Co.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of W. P. Carey & Co. in the acquisition of
investments, the selection of tenants, the determination of any financing
arrangements, and upon the management of the assets. You will have no
opportunity to evaluate the terms of transactions or other economic or financial
data concerning our investments. You must rely entirely on the management
ability of W. P. Carey & Co. and the oversight of the board of directors.
W. P. Carey & Co. may be subject to conflicts of interest.
W. P. Carey & Co. manages our business and selects our real estate investments.
W. P. Carey & Co. has some conflicts of interest in its management of CPA(R):12,
which arise primarily from the involvement of W. P. Carey & Co. and its
affiliates in other activities that may conflict with CPA(R):12 and the payment
of fees by us to W. P. Carey & Co. and its affiliates. The activities in which a
conflict could arise between CPA(R):12 and W. P. Carey & Co. are:
- the receipt of commissions, fees and other compensation by W. P.
Carey & Co. and its affiliates for property purchases, leases,
sales and financing for CPA(R):12, which may cause W. P. Carey &
Co. and its affiliates to engage in transactions that generate
higher fees, rather than transactions that are more appropriate
or beneficial for our business;
- agreements between CPA(R):12 and W. P. Carey & Co. or any of its
affiliates, including agreements regarding compensation of W. P.
Carey & Co. and its affiliates, will not be negotiated on an
arm's length basis as would occur if the agreements were with
unaffiliated third parties;
- purchases and loans from affiliates, subject to CPA(R):12's
investment procedures, objectives and policies, which will
increase fees and interest payable to affiliates, thereby
decreasing our net income and possibly causing us to incur
higher leverage levels;
- competition with certain affiliates for property acquisitions,
which may cause W. P. Carey and its affiliates to direct
properties suitable for us to other related entities;
- disposition, incentive and termination fees, which are based on
the sale price of properties, may cause a conflict between the
advisor's desire to sell a property and our plans to hold or
sell the property.
Inherent in these transactions is the conflict of interest that arises due to
the potential impact of the transaction on the amount of fees received by W. P.
Carey & Co. and/or its affiliates and the distributions to shareholders.
Liability for uninsured losses could adversely affect our financial condition.
Losses from disaster-type occurrences (such as wars or earthquakes) may be
either uninsurable or not insurable on economically viable terms. Should an
uninsured loss occur, we could lose our capital investment and/or anticipated
profits and cash flow from one or more properties.
Potential liability for environmental matters could adversely affect our
financial condition..
We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. Some of these
laws could impose the following on CPA(R):12:
- Responsibility and liability for the cost of removal or
remediation of hazardous substances released on our property,
generally without regard to our knowledge or responsibility of
the presence of the contaminants.
- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for
the disposal or treatment of these substances.
- Potential liability for common law claims by third parties based
on damages and costs of environmental contaminants.
Our costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to borrow using
the property as collateral.
Our use of debt to finance acquisitions could adversely affect our cash flow.
-9-
Most of our property acquisitions have been made by borrowing a portion of the
purchase price of our properties and securing the loan with a mortgage on the
property. If we are unable to make our debt payments as required, a lender could
foreclose on the property or properties securing its debt. This could cause us
to lose part or all of our investment which in turn could cause the value of the
shares and distributions to shareholders to be reduced. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity
invested in the property. We typically borrow between 55% and 65% of the
purchase price of our properties. There is no limitation on the amount borrowed
on a single property and the aggregate borrowings may not exceed 75% of the
value of all properties. Any borrowings in excess of 75% of the value of all
properties must be approved by a majority of the independent directors and
disclosed to shareholders. As of December 31, 2002, we had limited recourse
mortgage notes payable outstanding of $194,934,000.
Failure to qualify as a REIT could adversely affect our operations and ability
to make distributions.
If we fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to shareholders
because of the additional tax liability. In addition, distributions to
shareholders would no longer qualify for the distributions paid deduction and we
would no longer be required to make distributions. We might be required to
borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and
various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize
our REIT status.
The Internal Revenue Service may take the position that specific sale-leaseback
transactions we will treat as true leases are not true leases for federal income
tax purposes but are, instead, financing arrangements or loans. If a
sale-leaseback transaction were so recharacterized, we might fail to satisfy the
Asset Tests or the Income Tests and consequently lose our REIT status effective
with the year of recharacterization. Alternatively, the amount of our REIT
Taxable Income could be recalculated which could cause us to fail the
Distribution Test.
Balloon payment obligations may adversely affect our financial condition..
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets.
Scheduled balloon payments for the next five years are as follows:
- 2003 - $5.1 million;
- 2004 - None;
- 2005 - $4.1 million;
- 2006 - $5.3 million; and
- 2007 - $16.3 million
A limit on the number of shares a person may own may discourage a takeover.
Our articles of incorporation restrict ownership of more than 9.8% of the
outstanding shares by one person. These restrictions may discourage a change of
control of CPA(R):12 and may deter individuals or entities from making tender
offers for shares, which offers might be financially attractive to shareholders
or which may cause a change in the management of CPA(R):12.
Maryland law could restrict change in control.
Provisions of Maryland law applicable to us prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting power
of outstanding shares;
- an affiliate of us who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10%
or more of the voting power of our outstanding shares ("an
interested shareholder"); or
-10-
- an affiliate of an interested shareholder.
These prohibitions last for five years after the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in shareholders' interest. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of directors prior to the time that
someone becomes an interested shareholder.
Our participation in joint ventures creates additional risk.
We participate in joint ventures with other entities, some of which may be
unaffiliated with us. There are additional risks involved in these types of
transactions. These risks include the potential of our joint venture partner
becoming bankrupt and the possibility of diverging or inconsistent economic or
business interests of us and our partner. These diverging interests could result
in, among other things, exposing us to liabilities of the joint venture in
excess of our proportionate share of these liabilities. The partition rights of
each owner in a jointly owned property could reduce the value of each portion of
the divided property. In addition, the fiduciary obligation that W. P. Carey &
Co. or our board may owe to our partner in an affiliated transaction may make it
more difficult for us to enforce our rights.
In some of our joint venture relationships with publicly registered investment
programs or other entities sponsored by Carey Asset Management Corp. or one of
its affiliates, we enter into investments as tenants-in-common. This poses risks
in addition to those mentioned above. The partition rights of each co-tenant in
a tenancy-in-common could reduce the value of each portion of the divided
property. In addition, the fiduciary obligation that Carey Asset Management
Corp. or our board may owe to our partner in an affiliated transaction may make
it more difficult for us to enforce our rights.
We may incur costs to finish build-to-suit properties.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Oftentimes,
completion risk, cost overruns and on-time delivery are the obligations of the
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process we may be required to incur project costs to complete all or part of the
project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio returns.
-11-
Item 2. Properties.
----------
Set forth below is certain information relating to the Company's properties
owned as of December 31, 2002.
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM MAXIMUM TERM
- ------------------------------- ------------------- -------------- -------- ---------------- ----------- ---------- -------------
ADVANCED MICRO DEVICES, INC.(3)
33 1/3% interest in
a limited liability
company owning land
Sunnyvale, CA and buildings 361,965 $27.01 $3,258,938 CPI Aug. 2019 Aug. 2039
GALYAN'S TRADING COMPANY(3)
Lombard, IL; Fairfax, VA 100% 197,245 12.46 2,457,345 Stated Dec. 2020 Dec. 2060
SPECTRIAN CORPORATION(3)
Sunnyvale, CA (2) 100% 141,787 15.07 2,136,344 CPI Nov. 2011 Nov. 2026
SCOTT COMPANIES, INC.(3)
San Leandro, CA 100% 432,081 4.77 2,062,281 CPI Jan. 2017 Jan. 2032
SPECIAL DEVICES, INC.(3)
Moorpark, CA; Mesa, AZ 50% 249,276 15.74 1,962,000 CPI Jun. 2021 Jun. 2041
PERRY GRAPHIC COMMUNICATIONS AND JUDD'S INCORPORATED(3)
Baraboo and Waterloo, WI 100% 899,476 2.10 1,888,875 Stated Dec. 2017 Dec. 2032
BEST BUY CO., INC.(3)
Fort Collins, CO; Matteson
and Schaumburg, IL;
Attleboro, MA; Nashua, NH; 37% interest in a
Albuquerque, NM; Arlington, general
Beaumont, Dallas, Fort Worth partner-ship
and Houston, TX; Virginia owning land and
Beach, VA buildings 585,644 8.58 1,859,160 Stated Apr. 2018 Apr. 2033
WESTELL TECHNOLOGIES, INC.(3)
Aurora, IL 100% 210,877 8.63 1,818,879 Stated Sep. 2017 Sep. 2027
TRUSERV CORPORATION(3)
Kingman, Arizona;
Springfield, Oregon;
Fogelsville, Pennsylvania; 15% interest in
Jonesboro, Georgia; Kansas three limited
City, Missouri; Woodland, partnerships owning
California; Corsicana, Texas land and buildings 3,443,100 3.49 $1,801,073 Stated Dec. 2022 Nov. 2042
TELOS CORPORATION(3)
Loudon County, VA 100% 192,775 8.64 1,665,539 CPI Mar. 2016 Mar. 2036
APPLIED MATERIALS, INC. (ETEC SYSTEMS, INC.)(3)
-12-
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM MAXIMUM TERM
- ------------------------------- ------------------- -------------- -------- ---------------- ----------- ---------- -------------
Majority interest
in a limited
liability company
owning land and
Hayward, CA building(5) 241,220 6.72 $1,620,649 CPI Sep. 2014 Jan. 2030
CAREER EDUCATION CORPORATION
Mendota Heights, MN 100% 136,400 11.63 1,585,882 Stated May 2011 May 2021
Q CLUBS, INC.(3)
Austin, TX(3) 100% 43,935 17.31 760,332 CPI Jun. 2013 Jun. 2033
Houston, TX 100% 46,733 16.82 786,119 CPI Jul. 2016 Jul. 2036
------ ---------
Total: 90,668 1,546,451
PPD DEVELOPMENT, INC.(3)
Austin, TX 100% 180,789 8.32 1,504,190 CPI Nov. 2010 Nov. 2030
DEL MONTE CORPORATION(3)
Mendota, IL; Plover, Toppenish
and Yakima, WA 50%(6) 735,766 4.02 1,477,713 CPI Jun. 2016 Jun. 2056
SICOR, INC.(3)
50% interest in a
general
partner-ship
owning land and
San Diego, CA (2) buildings 144,312 20.41 1,472,736 CPI Jul. 2009 Jul. 2044
THE UPPER DECK COMPANY(3)
50% interest in a
limited liability
company owning
Carlsbad, CA land and buildings 294,780 9.85 1,452,220 CPI Dec. 2020 Dec. 2040
SILGAN CONTAINERS CORPORATION(3)
Fort Dodge, IA; Oconomowoc
and Menomonie, WI 100% 330,561 4.30 1,421,352 CPI Oct. 2014 Oct. 2029
COMPUCOM SYSTEMS, INC.(3)
33 1/3% interest in
a limited liability
company owning land
Dallas, TX and buildings 255,351 16.54 1,408,043 CPI Apr. 2019 Apr. 2029
THE BON-TON STORES, INC.(3)
Allentown and Johnstown, PA 100% 480,059 2.81 1,348,121 CPI Apr. 2017 Apr. 2047
MCLANE COMPANY, INC.(3)
40% interest in two
limited liability
Shawnee, KS; companies owning
Burlington, NJ; land and buildings
Manassas, VA 529,602 6.06 1,282,990 CPI Dec. 2020 Dec. 2040
TEXTRON, INC.(3)
50% interest in a
limited liability
company owning
Gilbert, AZ land and building 243,370 10.19 1,239,739 CPI Jan. 2019 Jan. 2039
-13-
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM MAXIMUM TERM
- ------------------------------- ------------------- -------------- -------- ---------------- ----------- ---------- -------------
JEN-COAT, INC.(3)
Westfield, MA (2) 100% 377,500 3.21 1,210,000 CPI Aug. 2021 Aug. 2041
CHILDTIME CHILDCARE, INC.(3)
Chandler, AZ; Fleming Island,
FL; Ackworth, GA; Hauppauge
and Patchogue, NY; New
Territory and Sugarland, TX;
Hampton, VA; Siverdale, WA 100% 71,372 16.67 1,190,074 CPI Jun. 2017 Jun. 2027
ORBSEAL EUROPE I LLC AND ORBSEAL - AUSTRALIA LLC 3
Richmond, MO 100% 266,585 3.80 1,011,750 CPI Sep. 2021 Sep. 2041
PACIFIC LOGISTICS, L.P.(3)
Dallas, TX 100% 219,614 4.57 1,003,257 CPI Jan. 2019 Jan. 2059
THE GARDEN COMPANIES, INC.(3)
Chattanooga, TN 100% 242,317 3.80 920,292 CPI Jun. 2015 Jun. 2035
SHOPRITE SUPERMARKETS, INC.(3, 4)
45% interest in
a limited
partnership
ownding land and Stated/%
Ellenville and Warwick, NY buildings 136,438 16.44 1,009,426 of Sales Oct. 2024 Oct. 2044
GARDEN RIDGE CORPORATION 100% 141,284 6.65 939,580 CPI Apr. 2016 Apr. 2036
South Tulsa, OK
CELADON GROUP, INC.(3)
Indianapolis, IN 100% 76,326 11.80 900,891 CPI Sep. 2021 Sep. 2036
RHEOMETRIC SCIENTIFIC, INC.(3)
Piscataway, NJ 100% 104,120 8.65 900,717 CPI Feb. 2011 Feb. 2031
NUTRAMAX PRODUCTS, INC.
Houston, TX 100% 248,960 3.47 864,498 CPI Apr. 2013 Apr. 2018
VARIOUS TENANTS(3)
Newark, DE 100% 162,220 5.24 850,430 (7)
RANDALL INTERNATIONAL, INC.(3)
Carlsbad, CA 100% 88,329 8.82 779,230 CPI Jan. 2016 Jan. 2026
RAVE REVIEWS CINEMAS, L.L.C.(3)
Hickory Creek, TX 100% 57,126 13.63 778,348 CPI Feb. 2021 Feb. 2041
VERMONT TEDDY BEAR CO., INC.(3)
Shelburne, VT 100% 55,446 11.83 656,027 CPI Jul. 2017 Jul. 2032
VIASYSTEMS GROUP INC.(3)
Milford, MA 100% 108,125 6.03 652,034 CPI Jul. 2009 Jul. 2014
SENTRY TECHNOLOGY CORPORATION(3)
Hauppauge, NY 100% 68,333 8.03 548,739 CPI Dec. 2016 Dec. 2020
BALANCED CARE CORPORATION(3)
Mechanicsburg, PA 100% 41,187 12.79 526,730 CPI Jun. 2014 Jun. 2024
-14-
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM MAXIMUM TERM
- ------------------------------- ------------------- -------------- -------- ---------------- ----------- ---------- -------------
FLEMING COMPANIES, INC. 3
40% interest in a
limited liability
company owning
Grand Rapids, MI land and bulding 179,462 6.93 497,168 Stated Jul. 2006 Jul. 2026
INTERNATIONAL MANAGEMENT CONSULTANT, INC.
Ashburn, VA 100% 69,983 5.89 412,179 CPI Feb. 2019 Feb. 2019
WAL-MART STORES, INC. 3
Greenfield, IN 100% 82,620 4.81 397,226 Stated Jan. 2005 Jan. 2020
COMPASS BANK FOR SAVINGS(3)
Bourne, Sandwich and Wareham,
MA 100% 22,208 9.06 201,310 CPI Dec. 2017 Dec. 2037
1. Percentage of ownership in land and building, except as noted. If
ownership is less than 100%, ownership is as a tenant-in-common
unless otherwise indicated.
2. Share of Current Annual Rents is the product of the Square Footage,
the Rent per Square Foot, and the Ownership Interest percentage.
3. These properties are encumbered by mortgage notes payable. 4.
Includes percentage of sales rents.
5. Under the limited liability company agreement, the Company has a
100% interest in a portion of the leased properties and a 50.01%
interest in the other portion of the property.
6. Mendota, Plover and Toppenish properties are owned through an
interest in a limited liability company and the Yakima property is
owned as a tenant-in-common.
7. Subject to short-term leases.
Item 3. Legal Proceedings.
As of the date hereof, Registrant is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2002 to a vote of security holders, through the solicitation of proxies or
otherwise.
-15-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to the Company's common equity is hereby incorporated
by reference to page 32 of Registrant's Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of the
Company's Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 2 to 11 of the Company's Annual Report contained in Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
Approximately $189,722,000 of the Company's long-term debt bears interest at
fixed rates, and therefore the fair value of these instruments is affected by
changes in the 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 December 31, 2002
ranged from 6.5% to 8.75% per annum. The interest rate on the variable rate debt
as of December 31, 2002 is 5.64%.
(in thousands)
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $5,536 $5,948 $10,443 $11,540 $24,560 $131,695 $189,722 $196,680
Weighted average
interest rate 7.4% 7.4% 7.72% 7.75% 7.58% 7.47%
Variable rate debt 5,212 - - - - - 5,212 5,212
CPA(R):12 has a $20,000,000 credit facility available to it for investment
opportunities and potential liquidity needs. As of December 31, 2002 there was
no amounts outstanding under the credit facility. The Company 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
the Company 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 the Company and matures in October
2003.
-16-
Item 8. Consolidated Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data of
Registrant are hereby incorporated by reference to pages 12 to 31 of the
Company's Annual Report contained in Appendix A:
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 2002 and 2001
(iii) Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000.
(iv) Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2000, 2001 and 2002.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
(vi) Notes to Consolidated Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
-17-
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
-18-
PART IV
Item 14. 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 December 31, 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 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.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referred to above.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a part of
this Report:
Report of Independent Accountants.
Consolidated Balance Sheets, December 31, 2002 and 2001.
Consolidated Statements of Income for the years ended December 31, 2002,
2001, and 2000.
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2000, 2001, and 2002.
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001, and 2000.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by reference
to pages 12 to 31 of the Company's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedules:
The following schedules are filed as a part of this Report:
Report of Independent Accountants.
Schedule III - Real Estate and Accumulated Depreciation as of December 31,
2002.
Schedule III of the Company is contained on pages 28 to 33 of this Form
10-K.
-19-
Financial Statement Schedules other than those listed above are omitted
because the required information is given in the Consolidated Financial
Statements, including the Notes thereto, or because the conditions
requiring their filing do not exist.
(a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents other
than those designated as being filed herewith are incorporated herein by
reference.
Exhibit No. Description Method of Filing
3.1 Articles of Incorporation of Registrant. Exhibit 3(A) to Registration Statement
(Form S-11) No. 33-68728
3.2 Bylaws of Registrant. Exhibit 3(B) to Registration Statement
(Form S-11) No. 33-68728
10.1 Advisory Agreement between Registrant and Carey Property Advisors. Exhibit 10(A) to Registration
Statement (Form S-11) No. 33-68728
10.2 Lease Agreement dated October 8, 1993 between Elwa-BV (NY) QRS 11-24, Filed as Exhibit 10.2 to Registrant's
Inc., as Landlord, and Big V Supermarkets, Inc., as Tenant. Form 10-K dated March 30, 1995
10.3 Amendment to Lease Agreement dated July 15, 1994 by and between Elwa-BV Filed as Exhibit 10.3 to Registrant's
(NY) QRS 11-24, Inc. and Big V Supermarkets, Inc. Form 10-K dated March 30, 1995
10.4 Amended and Restated Mortgage and Security Agreement dated October 8, Filed as Exhibit 10.4 to Registrant's
1993 from Elwa-BV (NY) QRS 11-24, Inc., as Mortgagor, to Key Bank of Form 10-K dated March 30, 1995
New York.
10.5 $7,500,000 Amended, Restated and Consolidated Bonds dated October 8, Filed as Exhibit 10.5 to Registrant's
1993. Form 10-K dated March 30, 1995
10.6 Modification and Assumption Agreement dated July 15, 1994 among Elwa-BV Filed as Exhibit 10.6 to Registrant's
(NY) QRS 11-24, Inc., Elwa-BV (NY) QRS 12-3, Inc. and Key Bank of New Form 10-K dated March 30, 1995
York, as Lender.
10.7 Lease dated April 15, 1993 between BB Property Company, as Lessor, and Filed as Exhibit 10.7 to Registrant's
Best Buy Co., Inc., as Lessee. Form 10-K dated March 30, 1995
10.11 Owner's Lien Agreement dated April 15, 1993 by Corporate Property Filed as Exhibit 10.11 to Registrant's
Associates 10 Incorporated ("CPA(R):10") and Carey Institutional Form 10-K dated March 30, 1995
Properties Incorporated ("CIP(TM)"), for the benefit of Teachers Insurance
and Annuity Association of America.
10.12 First Amendment to Owner's Lien Agreement dated May 27, 1994 by Filed as Exhibit 10.12 to Registrant's
CPA(R):10, CIP(TM)and Registrant for the benefit of Teachers Insurance and Form 10-K dated March 30, 1995
Annuity Association of America.
10.13 $3,353,745 Limited Obligation Promissory Note dated May 13, 1994 from Filed as Exhibit 10.13 to Registrant's
BBC (NE) QRS 12-2, Inc., as Borrower, to Registrant, as Lender. Form 10-K dated March 30, 1995
10.14 Lease Agreement dated December 21, 1993 by and between GENA Property Filed as Exhibit 10.14 to Registrant's
Company, as Landlord, and Gensia, Inc., as Tenant. Form 10-K dated March 30, 1995
10.15 Deed of Trust, Security Agreement and Financing Statement dated
December 21, 1993 between GENA Property Company, as Trustor, and The Filed as Exhibit 10.15 to Registrant's
Northwestern Mutual Life Insurance Company, as Trustee. Form 10-K dated March 30, 1995
-20-
Exhibit No. Description Method of Filing
10.16 $13,000,000 Promissory Note dated December 21, 1993 from GENA Property Filed as Exhibit 10.16 to Registrant's
Company, as Obligor, to The Northwestern Mutual Life Insurance Company, Form 10-K dated March 30, 1995
as Obligee.
10.17 Lease Agreement dated February 1, 1995 by and between ESI (CA) QRS Filed as Exhibit 10.17 to Registrant's
12-6, Inc., as Landlord, and ETEC Systems, Inc., as Tenant. Form 8-K dated June 23, 1995
10.18 Deed of Trust, Assignment of Rents and Security Agreement dated Filed as Exhibit 10.18 to Registrant's
February 1, 1995 by ESI (CA) QRS 12-6, Inc., as Trustor, in favor of Form 8-K dated June 23, 1995
First American Title Insurance Company, as Trustee, for the benefit of
Creditanstalt-Bankverein, as Beneficiary.
10.19 $6,350,000 Real Estate Note dated February 1, 1995 by ESI (CA) QRS Filed as Exhibit 10.19 to Registrant's
12-6, Inc., as Maker, to Creditanstalt- Bankverein, as Holder. Form 8-K dated June 23, 1995
10.20 Lease dated July 3, 1994 by and between Greenwalt Development, Inc., as Filed as Exhibit 10.20 to Registrant's
Landlord, and Wal-Mart Stores, Inc., as Tenant. Form 8-K dated June 23, 1995
10.21 Assignment and Assumption of Lease dated February 10, 1995 by and Filed as Exhibit 10.21 to Registrant's
between Greenwalt Development, Inc., as Assignor, and WALS (IN) QRS Form 8-K dated June 23, 1995
12-5, Inc., as Assignee.
10.22 Estoppel Certificate dated February 9, 1995 from Wal-Mart Stores, Inc. Filed as Exhibit 10.22 to Registrant's
to WALS (IN) QRS 12-5, Inc. Form 8-K dated June 23, 1995
10.23 Lease Agreement dated June 8, 1995 by and between SFC (TX) QRS 12-7, Filed as Exhibit 10.23 to Registrant's
Inc., as Landlord, and Sports & Fitness Clubs of America, Inc., as Form 8-K dated June 23, 1995
Tenant.
10.24 Loan Agreement dated June 8, 1995 by and between SFC (TX) QRS 12-7, Filed as Exhibit 10.24 to Registrant's
Inc., as Borrower, and Bank One, Texas, N.A. Form 8-K dated June 23, 1995
10.25 $2,750,000 Note dated June 8, 1995 from SFC (TX) QRS 12-7, Inc. to Bank Filed as Exhibit 10.25 to Registrant's
One, Texas, N.A. Form 8-K dated June 23, 1995
10.26 Deed of Trust and Security Agreement dated June 8, 1995 from SFC (TX) Filed as Exhibit 10.26 to Registrant's
QRS 12-7, Inc., as Mortgagor, to Mr. Brian J. Tuerff, as Trustee, for Form 8-K dated June 23, 1995
Bank One, Texas, N.A., as Mortgagee.
10.27 Lease Agreement dated June 20, 1995 by and between Bud Limited Filed as Exhibit 10.27 to Registrant's
Liability Company, as Landlord, and NK Lawn & Garden Co., as Tenant. Form 8-K dated June 23, 1995
10.28 Construction Agency Agreement dated October 31, 1995 between Del Filed as Exhibit 10.28 to Registrant's
Monte Corporation and DELMO (PA) QRS 11-36 and DELMO (PA) QRS 12-10. Form 8-K dated November 27, 1995
10.29 Lease Agreement dated October 31, 1995 by and between DELMO (PA) QRS Filed as Exhibit 10.29 to Registrant's
11-36 and DELMO (PA) QRS 12-10, collectively, as Landlord, and Del Form 8-K dated November 27, 1995
Monte Corporation, as Tenant.
10.30 Lease Agreement dated November 13, 1995 by and between ABI (TX) QRS Filed as Exhibit 10.30 to Registrant's
12-11, Inc., as Landlord, and Pharmaco LSR International Inc., as Form 8-K dated November 27, 1995
Tenant.
-21-
Exhibit No. Description Method of Filing
10.31 Lease Agreement dated December 26, 1995 by and between Cards Limited Filed as Exhibit 2.1 to Registrant's
Liability Company, as Landlord, and The Upper Deck Company, as Tenant. Form 8-K dated February 2, 1996
10.32 $15,000,000 Promissory Note dated January 3, 1996 from Cards Limited Filed as Exhibit 2.2 to Registrant's
Liability Company to Column Financial, Inc. Form 8-K dated February 2, 1996
10.33 Lease Agreement dated February 23, 1996 by and between RSI (NJ) QRS Filed as Exhibit 2.1 to Registrant's
12-13, Inc., as Landlord, and Rheometric Scientific, Inc., as Tenant. Form 8-K dated March 9, 1996
10.34 $3,300,000 Promissory Note dated February 23, 1996 from RSI (NJ) QRS Filed as Exhibit 2.2 to Registrant's
12-13, Inc. to NatWest Bank N.A. Form 8-K dated March 9, 1996
10.35 Stock Purchase Warrant for 132,617 Shares of Rheometric Scientific, Filed as Exhibit 2.3 to Registrant's
Inc. Common Stock. Form 8-K dated March 9, 1996
10.36 Stock Purchase Warrant for 331,543 Shares of Rheometric Scientific, Filed as Exhibit 2.4 to Registrant's
Inc. Common Stock. Form 8-K dated March 9, 1996
10.37 Lease Agreement dated March 11, 1996 by and between TEL (VA) QRS 12-15, Filed as Exhibit 10.41 to Registrant's
Inc., as Landlord, and Telos Corporation, a Maryland corporation, Telos Post-Effective Amendment No. 3 dated
Corporation, a California corporation, Telos Field Engineering, Inc., a March 6, 1997
Delaware corporation, and Telos International Corp., a Delaware
corporation, as Tenants.
10.41 Lease Agreement dated July 23, 1996 by and between SFC (TX) QRS 12-18, Filed as Exhibit 10.45 to Registrant's
Inc., as Landlord, and Sports & Fitness Clubs of America, Inc., as Post-Effective Amendment No. 3 dated
Tenant. March 6, 1997
10.42 Stock Purchase Warrant for 5,089 Shares of Q Clubs, Inc. Common Stock. Filed as Exhibit 10.46 to Registrant's
Post-Effective Amendment No. 3 dated
March 6, 1997
10.43 Guaranty and Suretyship Agreement made by Celadon Group, Inc. to QRS Filed as Exhibit 10.47 to Registrant's
12-17, Inc. Post-Effective Amendment No. 3 dated
March 6, 1997
10.44 Lease Agreement dated September 19, 1996 by and between CEL (IN) QRS Filed as Exhibit 10.48 to Registrant's
12-17, Inc., as Landlord, and Celadon Trucking Services, Inc., as Post-Effective Amendment No. 3 dated
Tenant. March 6, 1997
10.45 Lease Agreement dated November 19, 1996 by and between SPEC (CA) QRS Filed as Exhibit 10.49 to Registrant's
12-20, Inc., as Landlord, and Spectrian Corporation, as Tenants. Post-Effective Amendment No. 3 dated
March 6, 1997
10.46 Lease Agreement dated December 24, 1996 by and between NOG (NY) QRS Filed as Exhibit 10.50 to Registrant's
12-23, Inc., as Landlord, and Knogo North America, Inc., as Tenants. Post-Effective Amendment No. 3 dated
March 6, 1997
10.47 Amendment to Lease dated December 14, 1996 by and between WEEDS (OK) Filed as Exhibit 10.51 to Registrant's
QRS 12-22, Inc., as Landlord, and Garden Ridge, L.P., as Tenant. Post-Effective Amendment No. 3 dated
March 6, 1997
10.48 Mortgage Assignment of Rents and Security Agreement dated December 27, Filed as Exhibit 10.52 to Registrant's
1996 between WEEDS (OK) QRS 12-22, Inc., Mortgagor, and GMAC Commercial Post-Effective Amendment No. 3 dated
Mortgage Corporation. March 6, 1997
-22-
Exhibit No. Description Method of Filing
10.49 Lease Agreement dated January 23, 1997 by and between BUILD (CA) QRS Filed as Exhibit 10.53 to Registrant's
12-24, Inc., as Landlord, and Scott Corporation, as Tenants. Post-Effective Amendment No. 3 dated
March 6, 1997
10.50 Lease agreement dated July 8, 1997 by and between GGAP (MA) QRS 12-31, Filed as Exhibit 10.1 to Registrant's
Inc., as Landlord, and PAGG Corporation, as Tenants. Form 8-K dated June 13, 1997
10.51 Lease agreement dated July 10, 1997 by and between URSA (VT) QRS Filed as Exhibit 10.2 to Registrant's
12-30, Inc., as Landlord, and The Vermont Teddy Bear Company, as Form 8-K dated June 13, 1997
Tenants.
10.52 Lease agreement dated April 10, 1997 by and between BT (PA) QRS 12-25, Filed as Exhibit 10.3 to Registrant's
Inc., as Landlord, and The Bon-Ton Department Stores, Inc., as Tenants. Form 8-K dated June 13, 1997
10.53 Lease agreement dated June 13, 1997 by and between CAN (WI) QRS 12-34, Filed as Exhibit 10.4 to Registrant's
Inc., as Landlord, and Silgan Containers Corporation, as Tenants. Form 8-K dated June 13, 1997
10.54 Lease agreement dated September 30, 1997 by and between CPA(R):12, Inc. Filed as Exhibit 10.1 to Registrant's
as Landlord, and Westell, Inc., as Tenant. Form 8-K dated March 31, 1998
10.55 Lease agreement dated November 26, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.2 to Registrant's
Landlord, and Randall International, as Tenant. Form 8-K dated March 31, 1998
10.56 Lease agreement dated December 31, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.3 to Registrant's
Landlord, and Sandwich Cooperative Bank, as Tenant. Form 8-K dated March 31, 1998
10.57 Lease agreement dated November 12, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.4 to Registrant's
Landlord, and Brown Institute, Ltd., as Tenant. Form 8-K Dated March 31, 1998
10.58 Lease agreement dated September 25, 1997 by and between CPA(R):12, Inc. Filed as Exhibit 10.5 to Registrant's
as Landlord, and GDE Systems, Inc., as Tenant. Form 8-K dated March 31, 1998
10.59 Lease agreement dated July 8, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.6 to Registrant's
Landlord, and PAGG Corporation, as Tenant. Form 8-K dated March 31, 1998
10.60 Lease agreement dated September 23, 1997 by and between CPA(R):12, Inc. Filed as Exhibit 10.7 to Registrant's
as Landlord, and Texas Freezer Company, Inc., as Tenant. Form 8-K dated March 31, 1998
10.61 Lease agreement dated February 3, 1998 by and between CPA(R):12, Inc. and Filed as Exhibit 10.8 to Registrant's
CPA:14, Inc., as Landlords, and Etec Systems, Inc., as Tenant. Form 8-K dated March 31, 1998
10.62 Lease agreement dated December 16, 1997 by and between CPA(R):12, Inc., Filed as Exhibit 10.9 to Registrant's
as Landlord, and Perry Graphic Communications, Inc., as Tenant. Form 8-K dated March 31, 1998
21.1 Subsidiaries of Registrant as of March 20, 2003 Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
Limited Guaranty of Payment dated October 8, 1993 from CIP(TM), as Filed as Exhibit 28.1 to Registrant's
28.1 Guarantor, to Key Bank of New York, as Lender. Form 10-K dated March 30, 1995
28.2 Amendment to Limited Guaranty of Payment dated July 15, 1994 Filed as Exhibit 28.2 to Registrant's
among CIP(TM) and Registrant, Guarantors, and Key Bank Form 10-K dated March 30, 1995
of New York, as Lender.
-23-
Exhibit No. Description Method of Filing
28.3 Guaranty and Suretyship Agreement dated June 8, 1995 by Sports & Filed as Exhibit 28.3 to Registrant's
Fitness Clubs, Inc., as Guarantor, to SFC (TX) QRS 12-7, Inc., as Form 8-K dated June 23, 1995
Landlord.
28.4 Environmental Risk Agreement dated June 8, 1995 by SFC (TX) QRS 12-7, Filed as Exhibit 28.4 to Registrant's
Inc., as Indemnitor, to Bank One, Texas, N.A., as Lender. Form 8-K dated June 23, 1995
28.5 Guaranty and Suretyship Agreement dated June 20, 1995 by The Garden Filed as Exhibit 28.5 to Registrant's
Companies, Inc., as Guarantor, to Bud Limited Liability Company. Form 8-K dated June 23, 1995
28.6 Guaranty and Suretyship Agreement dated October 31, 1995 by Del Monte Filed as Exhibit 28.6 to Registrant's
Foods Corporation, as Guarantor, to DELMO (PA) QRS 11-36 and DELMO (PA) Form 8-K dated November 27, 1995
QRS 12-10, collectively, as Landlord.
28.7 Guaranty and Suretyship Agreement dated November 13, 1995 by Applied Filed as Exhibit 28.7 to Registrant's
Bioscience International, Inc., as Guarantor, to ABI (TX) QRS 12-11, Form 8-K dated November 27, 1995
Inc., as Landlord.
99.1 Certification of Chief Executive Officer Filed herewith
99.2 Certification of Chief Financial Officer Filed herewith
(b) Reports on Form 8-K
During the year ended December 31, 2002 the Registrant was not
required to file any reports on Form 8-K.
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
a Maryland corporation
3/25/03 BY: /s/ John J. Park
- -------------- ------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
3/25/03 BY: /s/ William Polk Carey
- -------------- ------------------------------------
Date William Polk Carey
Chairman of the Board and Director
(Principal Executive Officer)
3/25/03 BY: /s/ Gordon F. DuGan
- -------------- ------------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board, Senior Managing Director
and Chief Acquisitions Officer
3/25/03 BY: /s/ W. Sean Sovak
- -------------- ------------------------------------
Date W. Sean Sovak
President
3/25/03 BY: /s/ Francis X. Diebold
- -------------- ------------------------------------
Date Francis X. Diebold
Director
3/25/03 BY: /s/ Elizabeth P. Munson
- -------------- ------------------------------------
Date Elizabeth P. Munson
Director
3/25/03 BY: /s/ William Ruder
- -------------- ------------------------------------
Date William Ruder
Director
3/25/03 BY: /s/ George E. Stoddard
- -------------- ------------------------------------
Date George E. Stoddard
Director
3/25/03 BY: /s/ Ralph F. Verni
- -------------- ------------------------------------
Date Ralph F. Verni
Director
3/25/03 BY: /s/ John J. Park
- -------------- ------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
(Principal Financial Officer)
3/25/03 BY: /s/ Claude Fernandez
- -------------- ------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting Officer
(Principal Accounting Officer)
-25-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this annual report on Form 10-K of Corporate Property
Associates 12 Incorporated (the "Registrant");
2. Based on our knowledge, this annual 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 annual
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual 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 3/25/03 Date 3/25/03
--------------------------- --------------------------
/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)
-26-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this annual report on Form 10-K of Corporate Property
Associates 12 Incorporated (the "Registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual 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 3/25/03
/s/ John J. Park
-----------------------
John J. Park
Chief Financial Officer
-27-
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Corporate Property Associates 12 Incorporated:
Our audits of the consolidated financial statements referred to in our report
dated March 20, 2003 appearing in the 2002 Annual Report to Shareholders of
Corporate Property Associates 12 Incorporated (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2003
-28-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized
Personal Subsequent to Decrease in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Operating Method:
Distribution facility
leased to Wal-Mart
Stores, Inc. $ 1,964,327 $ 452,871 $ 3,325,910 $ 12,921
Office/Manufacturing
facility leased to
Applied Materials, Inc. 38,083,126 1,272,418 10,588,221 66,962,157 $(2,633,473)
Health club facilities
leased to Q Clubs, Inc. 4,315,418 3,152,874 8,524,126
Warehouse/office/research
facility leased to PPD
Development, Inc. 6,146,621 1,550,928 11,017,367 27,856
Research and development
facility leased in
Newark, Delaware leased
to various tenants 1,390,120 7,281,878 13,423 (4,281,421)
Distribution/warehouse
facility leased to
Celadon Group, Inc. 2,093,454 1,480,600 5,320,400 943,061
Office/research facility
leased to Spectrian
Corporation 8,537,713 5,570,775 12,073,204 4,119
Retail store leased to
Garden Ridge Corporation 5,492,014 1,857,607 6,204,923
Office/distribution
facility leased to
Sentry Technology
Corporation 3,271,697 1,603,488 3,321,512
Office/research facility
leased to Scott
Companies, Inc. 8,842,374 5,734,782 12,175,218 5,356
Child care centers leased
to Childtime Childcare,
Inc. 6,848,216 2,581,896 7,459,165
Retail/distribution
facility leased to The
Bon-Ton Stores, Inc. 6,112,829 1,780,000 10,261,885
Technology/manufacturing
facility leased to
Silgan Containers
Corporation 7,211,908 758,670 11,630,675 111,090
Office/research facility
leased to Viasystems
Group Inc. 2,788,932 1,080,000 4,469,738
Gross Amount at which Carried
at Close of Period (e)
----------------------
Life on
which
Depreciation
in Latest
Accumulated Statement of
Personal Depreciation Date Income
Description Land Buildings Property Total (d) Acquired is Computed
----------- ---- --------- -------- ----- --- -------- ------------
Operating Method:
Distribution facility
leased to Wal-Mart
Stores, Inc. $ 454,420 $ 3,337,282 $ 3,791,702 $ 657,027 2/10/1995 40 yrs.
Office/Manufacturing
facility leased to
Applied Materials, Inc. 1,272,444 74,916,879 76,189,323 8,210,805 2/16/1995 40 yrs.
Health club facilities
leased to Q Clubs, Inc. 3,152,874 8,524,126 11,677,000 1,478,793 6/8/1995 40 yrs.
Warehouse/office/research and
facility leased to PPD 7/25/1996
Development, Inc. 1,550,985 11,045,166 12,596,151 1,966,850 11/13/1995 40 yrs.
Research and development
facility leased in
Newark, Delaware leased
to various tenants 1,391,311 3,012,689 4,404,000 407,967 3/28/1996 40 yrs.
Distribution/warehouse
facility leased to
Celadon Group, Inc. 1,480,600 6,263,461 7,744,061 856,965 6/19/1996 40 yrs.
Office/research facility
leased to Spectrian
Corporation 5,570,775 12,077,323 17,648,098 1,849,224 11/19/1996 40 yrs.
Retail store leased to
Garden Ridge Corporation 1,857,607 6,204,923 8,062,530 937,202 12/16/1996 40 yrs.
Office/distribution
facility leased to
Sentry Technology
Corporation 1,603,488 3,321,512 4,925,000 501,687 12/24/1996 40 yrs.
Office/research facility
leased to Scott
Companies, Inc. 5,734,782 12,180,574 17,915,356 1,814,398 12/24/1996 40 yrs.
Child care centers leased
to Childtime Childcare,
Inc. 2,581,896 7,459,165 10,041,061 854,055 1/29/1997 40 yrs.
Retail/distribution
facility leased to The
Bon-Ton Stores, Inc. 1,780,000 10,261,885 12,041,885 1,464,456 4/10/1997 40 yrs.
Technology/manufacturing
facility leased to
Silgan Containers
Corporation 758,670 11,741,765 12,500,435 1,542,866 6/13/1997 40 yrs.
Office/research facility
leased to Viasystems
Group Inc. 1,080,000 4,469,738 5,549,738 609,393 7/8/1997 40 yrs.
-29-
Initial Cost to Company
-----------------------
Costs
Capitalized
Personal Subsequent to Decrease in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Office/manufacturing
facility leased to
Vermont Teddy Bear Co.,
Inc. 2,882,029 1,465,000 4,398,874 1,640 (43,950)
Warehouse/special
facility leased to
Pacific Logistics, L.P. 4,194,347 257,458 $1,109,900 7,150,544
Office/manufacturing
facility leased to
Westell Technologies,
Inc. 11,482,702 2,500,000 14,952,055
Office/manufacturing
facility leased to
Randall International,
Inc. 5,530,811 2,000,000 471,454 5,104,034 (12,370)
Administration/classroom
facility leased to
Career Education
Corporation 7,296,418 1,150,000 8,840,486 2,788,170
Printing facility leased
to Perry Graphic
Commun- ications, Inc.
and Judd's 10,234,715 642,000 18,467,948 8,000
Office/banking facility
leased to Compass Bank
for Savings 1,620,920 300,000 1,520,000
Manufacturing/distribution
facility leased to
Nutramax Products, Inc. 1,160,000 6,127,722 709,688
Office/light assembly
facility leased to
International
Management Consulting,
Inc. 668,211 6,163,589
Office facility leased to
Balanced Care
Corporation 2,719,321 558,600 4,291,443
Retail/services
facilities leased to
Galyan's Trading Company 16,254,424 8,070,000 16,134,421 57,241
Gross Amount at which Carried
at Close of Period (e)
----------------------
Life on
which
Depreciation
in Latest
Accumulated Statement of
Personal Depreciation Date Income
Description Land Buildings Property Total (d) Acquired is Computed
----------- ---- --------- -------- ----- --- -------- ------------
Office/manufacturing
facility leased to
Vermont Teddy Bear Co.,
Inc. 1,421,050 4,400,514 5,821,564 600,468 7/18/1997 40 yrs.
Warehouse/special
facility leased to
Pacific Logistics, L.P. 257,458 7,150,544 $1,109,900 8,517,902 1,457,479 9/23/1997 7 to 40 yrs.
Office/manufacturing
facility leased to
Westell Technologies,
Inc. 2,500,000 14,952,055 17,452,055 1,978,032 9/29/1997 40 yrs.
Office/manufacturing
facility leased to
Randall International,
Inc. 2,000,000 5,563,118 7,563,118 63,744 10/17/1997 40 yrs.
Administration/classroom
facility leased to
Career Education
Corporation 1,150,000 11,628,656 12,778,656 1,398,491 11/12/1997 40 yrs.
Printing facility leased
to Perry Graphic
Commun- ications, Inc.
and Judd's 642,000 18,475,948 19,117,948 2,328,731 12/16/1997 40 yrs.
Office/banking facility
leased to Compass Bank
for Savings 300,000 1,520,000 1,820,000 190,000 12/30/1997 40 yrs.
Manufacturing/distribution
facility leased to
Nutramax Products, Inc. 1,160,000 6,837,410 7,997,410 783,264 3/28/1998 40 yrs.
Office/light assembly
facility leased to
International
Management Consulting,
Inc. 668,211 6,163,589 6,831,800 585,341 5/18/1998 40 yrs.
Office facility leased to
Balanced Care
Corporation 558,600 4,291,443 4,850,043 347,237 6/23/1998 40 yrs.
Retail/services
facilities leased to
Galyan's Trading Company 8,070,000 16,191,662 24,261,662 1,028,845 6/29/2000 40 yrs.
-30-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized
Personal Subsequent to Decrease in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Operating Method:
Theater facility leased
to Rave Reviews
Cinemas, LLC. 4,383,981 1,760,000 5,176,372
Manufacturing/warehouse
facilities leased to
Jen-Coat, Inc. 7,078,552 1,193,200 10,325,125 2,447
Industrial/manufacturing
facility leased to
Orbseal, LLC. 6,121,616 760,000 9,187,644 250 (79,274)
--------- ----------- ------------ ---------- ------------ -----------
$181,508,465 $52,751,498 $201,797,158 $1,109,900 $101,816,194 $(7,050,488)
============ =========== ============ ========== ============ ===========
Gross Amount at which Carried
at Close of Period (e)
----------------------
Life on
which
Depreciation
in Latest
Accumulated Statement of
Personal Depreciation Date Income
Description Land Buildings Property Total (d) Acquired is Computed
----------- ---- --------- -------- ----- --- -------- ------------
Operating Method:
Theater facility leased
to Rave Reviews
Cinemas, LLC. 1,760,000 5,176,372 6,936,372 253,427 12/7/2000 40 yrs.
Manufacturing/warehouse
facilities leased to
Jen-Coat, Inc. 1,193,200 10,327,572 11,520,772 354,600 8/15/2001 40 yrs.
Industrial/manufacturing
facility leased to
Orbseal, LLC. 760,000 9,108,620 9,868,620 294,124 9/28/2001 40 yrs.
----------- ------------ ---------- ------------ -------
$52,710,371 $296,603,991 $1,109,900 $350,424,262 $34,815,471
=========== ============ ========== ============ ===========
-31-
See accompanying notes to Schedule.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Gross Amount at which
Initial Cost to Company Carried
----------------------- at Close of Period (e)
----------------------
Costs
Capitalized
Subsequent to Decrease in Net
Description Encumbrances Land Buildings Acquisition (a) Investment(c) Total Date Acquired
----------- ------------ ---- --------- --------------- ------------- ----- -------------
Direct Financing Method:
Manufacturing facility
leased to The Garden
Companies, Inc. $ 2,805,575 $1,544,265 $ 5,430,735 $ 6,975,000 6/20/1995
Office/manufacturing
facility leased to
Rheometric Scientific,
Inc. 5,407,398 1,510,791 4,789,209 $ 4,500 $(444,949) 5,859,551 2/23/1996
Office facility leased to
Telos Corporation 5,212,373 1,549,022 10,597,978 5,500 12,152,500 3/11/1996
----------- ---------- ----------- ------- ----------- -----------
$13,425,346 $4,604,078 $20,817,922 $10,000 $ (444,949) $24,987,051
=========== ========== =========== ======= =========== ===========
See accompanying notes to Schedule
-32-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and
acquisition costs including legal fees, appraisal fees, title costs
and other related professional fees.
(b) Represents (i) partial refund of purchase price and (ii) impairment
charges.
(c) The decrease in net investment is due to the sales of real estate.
(d) At December 31, 2002, the aggregate cost of real estate owned by
Registrant and its subsidiaries for Federal income tax purposes is
$312,345,550.
(e)
Reconciliation of Real Estate Accounted for
Under the Operating Method
December 31,
2002 2001
------------ -------------
Balance at beginning of year $341,780,814 $ 345,166,211
Additions 1,080,330 28,534,006
Dispositions -- (21,376,106)
Reclassification to equity investment -- (10,543,297)
Reclassification from net investment in direct
financing leases 7,563,118 --
------------ -------------
Balance at close of year $350,424,262 $ 341,780,814
============ =============
Reconciliation of Accumulated Depreciation
December 31,
2002 2001
----------- ------------
Balance at beginning of year $27,327,123 $ 22,333,095
Depreciation expense 7,488,348 7,432,476
Dispositions -- (1,128,060)
Reclassification to equity investment -- (1,310,388)
----------- ------------
Balance at close of year $34,815,471 $ 27,327,123
=========== ============
-33-
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
2002 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except share amounts)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATING DATA:
Revenues $ 46,680 $ 46,051 $ 44,927 $ 39,276 $ 34,563
Income before extraordinary
items 18,896 27,948 25,010 19,871 12,078
Net income 16,650 27,948 25,010 19,871 11,699
Basic earnings per share
before extraordinary
items(1) .63 .94 .87 .69 .42
Basic earnings per share(1) .55 .94 .87 .69 .41
Weighted average number of
shares outstanding -basic 30,038,268 29,763,716 28,685,620 28,615,971 28,416,013
Dividends paid 24,692 24,205 23,435 23,268 23,028
Dividends paid per share .82 .82 .82 .81 .81
Payments of mortgage
principal(2) 4,981 4,416 3,998 3,400 2,174
BALANCE SHEET DATA:
Total consolidated assets 472,129 447,241 441,209 418,088 398,604
Long-term obligations(3) 189,166 166,446 145,547 133,351 113,868
(1) The Company has a simple equity capital structure with only common stock
outstanding. As a result, the Company has presented basic per share
amounts only.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents mortgage obligations and deferred acquisition fees due after
more than one year.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 12 Incorporated ("CPA(R):12") should
be read in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2002. The following discussion includes
forward looking statements. Forward looking statements, which are based on
certain assumptions, describe future plans, strategies and expectations of
CPA(R):12. 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 plan
expressed or implied by such forward looking statements. The risk factors are
fully described in Item 1 of this Annual Report on Form 10-K. Accordingly, such
information should not be regarded as representations by CPA(R):12 that the
results or conditions described in such statements or objectives and plans of
CPA(R):12 will be achieved.
CPA(R):12 was formed in 1993 for the purpose of engaging in the business of
investing in and owning commercial and industrial real estate. Between February
1994 and September 1997, CPA(R):12 issued 28,334,451 shares of common stock at
$10 per share on a "best efforts" basis, raising $283,344,510. CPA(R):12 used
the proceeds from the public offerings along with limited recourse mortgage
financing to purchase properties and enter into long-term net leases with
corporate tenants. Substantially all of CPA(R):12's net leases have been
structured to place certain economic burdens of ownership on these corporate
tenants by requiring them to pay the costs of maintenance and repair, insurance
and real estate taxes. The lease obligations are unconditional. If possible,
CPA(R):12 also negotiates guarantees of the obligations from the parent company
of the lessees. The leases have generally been structured to include periodic
rent increases that are stated or based on increases in the Consumer Price Index
("CPI") or, for certain retail properties, may provide for additional rents
based on sales in excess of a specified base amount. In addition to investing
directly, CPA(R):12 may also acquire interests in real estate through joint
ventures. These joint ventures are generally with affiliates.
As a real estate investment trust ("REIT"), CPA(R):12 is not subject to federal
income taxes on amounts distributed to shareholders provided it meets certain
conditions including distributing at least 90% of its REIT taxable income to its
shareholders. CPA(R):12's primary objectives are to provide rising cash flow and
to protect its investors from the effects of inflation through rent escalation
provisions, property appreciation, tenant credit improvement and regular paydown
of limited recourse mortgage debt. In addition, CPA(R):12 has successfully
negotiated grants of common stock warrants from selected tenants and expects to
realize the benefits of appreciation from those grants. CPA(R):12 cannot
guarantee that its objectives will be ultimately realized.
CPA(R):12 is advised by W. P. Carey & Co. LLC and its wholly-owned subsidiary,
Carey Asset Management Corp., pursuant to an Advisory Agreement. CPA(R):12's
contract with W. P. Carey is renewable annually by Independent Directors who are
elected by CPA(R):12's shareholders. In connection with each renewal, W. P.
Carey is required to provide the Independent Directors with a comparison of the
fee structure with several similar companies. The Advisory Agreement also
provides that an independent portfolio valuation be performed annually and
Average Invested Assets, the basis for determining asset management and
performance fees, is based on the results of this independent valuation.
Critical Accounting Policies
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 recognized a
provision for uncollected rents which typically ranges between 0.25% and 1% of
lease revenues (rental income and interest income from direct financing leases)
and will measure its allowance against actual rent arrearages and adjust the
percentage applied.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Based on its actual experience during 2002, CPA(R):12 incurred a charge of
approximately 1% of revenues. In connection with two lease restructurings in
2002, CPA(R):12 granted forbearance on rent arrearages which have been converted
to promissory notes. CPA(R):12 will closely monitor the ability of the two
lessees to meet their rent and note obligations. As of December 31, 2002,
CPA(R):12 has a reserve of approximately $1,060,000 which approximates its
receivables that are at risk of default.
Operating real estate is stated at cost less accumulated deprecation. Costs
directly related to build-to-suit projects primarily interest, if applicable are
capitalized. No interest was capitalized in 2002, 2001 and 2000. CPA(R):12
considers a build-to-suit project as substantially completed upon the completion
of improvements, but no later than a date that is negotiated and stated in the
lease. If portions of a project are substantially completed and occupied and
other portions have not yet reached that stage, the substantially completed
portions are accounted for separately. CPA(R):12 allocates costs incurred
between the portions under construction and the portions substantially completed
and only capitalizesthose costs associated with the portion under construction.
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. As
CPA(R):12's investment objective is to hold properties on a long-term basis,
holding periods will range from five to ten years. In its evaluations, CPA(R):12
obtains market information from outside sources; however, such information
requires Management to determine whether the information received is appropriate
to the circumstances. Depending on the assumptions made and estimates used, the
estimated cash flow projected in the evaluation of long-lived assets can vary
within a range of outcomes. CPA(R):12 considers the likelihood of possible
outcomes in determining the best estimate of future cash flows. Because
substantially all of 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 performs a review of its estimated residual value of properties at
least annually to determine whether there has been an other than temporary
decline in CPA(R):12's current estimate of residual value of the underlying real
estate assets. If the review indicates a decline in residual values that is
other than temporary, a loss is recognized and the accounting for the direct
financing lease will be revised using the changed estimate, that is, a portion
of the future cash flow from the lessee will be recognized as a return of
principal rather than as revenue.
When assets are identified by Management as held for sale, CPA(R):12
discontinues depreciating the assets and estimates the sales price, net of
selling costs, of such assets. If, in Management's opinion , the net sales price
of the assets which have been identified for sale is less than the net book
value of the assets, an impairment charge is recognized and a valuation
allowance is established. If circumstances that previously were considered
unlikely occur and, as a result, CPA(R):12 decides not to sell a property
previously classified as held for sale, the property is reclassified as held and
used. A property that is reclassified is measured and recorded individually at
the lower of (a) the carrying value before it was classified as held for sale,
adjusted for any depreciation expense that would have been recognized had the
property been continuously classified as held and used, or (b) the fair value at
the time of the subsequent decision not to sell.
In 2002, CPA(R):12 acquired a subordinated interest in a mortgage trust that
consists of limited recourse loans on 62 properties that are owned by CPA(R):12
or three of its affiliates. 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. If there are adverse changes
in either market rates or the credit quality of the lessees, the model and,
therefore, the income recognized from the subordinated interests and the fair
value, will be adjusted. CPA(R):12 also holds warrants for common stock in
various lessees that are defined as derivative instruments because such warrants
are either readily convertible to cash or provide for net settlement upon
conversion. The changes in the fair value of these warrants are recognized
currently in earnings as gains or losses. The fair value is determined using
option pricing models which employ assumptions which include, but are not
limited to, volatility, risk-free rates and expected life. For warrants in
closely-held companies, certain factors may be derived from public companies
that are in the same industry and have a similar capital structure.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
CPA(R):12 and affiliates 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 a risk from a single lessee for
CPA(R):12 and the affiliates. The placement of an investment in a jointly held
entity or tenancy in common requires the approval of the Independent Directors.
All of the jointly held investments are structured so that CPA(R):12 and the
affiliates contribute equity, receive distributions and are allocated profit or
loss in amounts that are proportional to their ownership interests. No fees are
payable to affiliates under any of the limited partnership and joint venture
agreements. All of the jointly held investments are subject to contractual
agreements. The presentation of these jointly held investments is determined
based on factors such as controlling interest, significant influence and whether
each party has the ability to make independent decisions. Equity method
investments are reviewed for impairment in the event of a change in
circumstances that is other than temporary. An equity investment's value is only
impaired if Management's estimate of net realizable value of the investment is
less than the carrying value of the investment. To the extent an impairment has
occurred, the loss shall be measured as the excess of the carrying amount of the
investment over the fair value of the investment.
Stated rental revenue and interest income from direct financing leases are
recognized on a straight-line basis and a constant rate of interest,
respectively, over the terms of the respective leases. Unbilled rents receivable
represents the amount by which straight-line rental revenue exceeds rents
currently billed in accordance with the lease agreements. The majority of
CPA(R):12's leases provide for periodic rent increases based on formulas indexed
to increases in the CPI. CPI-based and other contingent-type rents are
recognized currently. 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
investments 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.
The general terms of CPA(R):12 leases are not necessarily different for
operating and direct financing leases; however the classification is based on
accounting pronouncements which are intended to indicate whether the risks and
rewards of ownership are retained by the lessor or transferred to the lessee.
Management believes that it retains certain risks of ownership regardless of
accounting classification.
CPA(R):12 measures derivative instruments, including derivative instruments
embedded in other contracts, if any, at fair value and records them as an asset
or liability, depending on CPA(R):12's rights or obligations under the
applicable derivative contract. For derivatives designated as fair value hedges,
the changes in the fair value of both the derivative instrument and the hedged
item are recorded in earnings. For derivatives designated as cash flow hedges,
the effective portions of the derivative are reported in other comprehensive
income, a component of shareholders' equity, and are subsequently reclassified
into earnings when the hedged item affects earnings (i.e., the forecasted event
occurs). Changes in fair value of derivative instruments not designated as
hedging and ineffective portions of hedges are recognized in the determination
of earnings.
Costs incurred in connection with obtaining mortgages and debt financing are
capitalized and amortized over the term of the related debt and included in
interest expense. Unamortized financing costs are included in charges for early
extinguishment of debt if a loan is retired and the costs have not been fully
amortized. Costs incurred in connection with leases are capitalized and
amortized on a straight-line basis over the terms of the related leases and
included in property expense. Unamortized leasing costs are also charged to
property expense upon early termination of the lease.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. Operating segments are
components of an enterprise about which financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management evaluates the
performance of its portfolio of properties as a whole, rather
4
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
than by identifying discrete operating segments. This evaluation includes
assessing CPA(R):12's ability to meet distribution objectives, increase the
dividend and increase value by evaluating potential investments in single tenant
net lease real estate and by seeking opportunities such as refinancing mortgage
debt at lower rates of interest, restructuring leases or paying off lenders at a
discount to the face value of the outstanding mortgage balance.
Results of Operations
Year Ended December 31, 2002 compared to Year Ended December 31, 2001
Net income for the year ended December 31, 2002 decreased by $11,298,000 to
$16,650,000 as compared with net income of $27,948,000 for the year ended
December 31, 2001. The decrease in net income was attributable to a realized
gain of $8,864,000 in 2001 on the sale of a property, charges on early
extinguishment of debt in 2002 of $2,245,000 and, to a lesser extent, a
$1,570,000 effect for the change in the fair value of common stock warrants,
which unrealized gain or loss during the year is included in the determination
of net income. In 2002, CPA(R):12 recorded an unrealized loss of $446,000 from
warrants as compared with a unrealized gain of $1,124,000 in 2002. Excluding the
effect of these items, income would have reflected an increase of $1,382,000.
The increase in income, as adjusted, was due primarily to increases in income
from equity investments, interest and other income and lease revenues, and a
decrease in general and administrative expenses. These were partially offset by
increases in interest expense and property expense.
Income from equity investments ("equity income") increased primarily as a result
of the acquisition of properties in June 2001 leased to Special Devices, Inc.
and the re-leasing of a property in Grand Rapids, Michigan in August 2001 that
had been vacant. In addition, equity income benefited from rent increases from
four leases held by equity investees. Of the $1,895,000 increase in equity
income, $298,000 was due to CPA(R):12's share of earnings from the Special
Devices properties, $385,000 was contributed by the new lease in Grand Rapids
and approximately $447,000 was due to rent increases. A portion of the increase
in income from equity investments was due to the reclassification of investments
to the equity method in connection with contributing interests into limited
partnerships owned with affiliates. 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. (formerly Big V Holding
Corp.) were reclassified to equity investments in the fourth quarter of 2001 and
the third quarter of 2002, respectively. Prior to the reclassification,
CPA(R):12's results of operations reflect the proportionate share of revenues
and expenses. Subsequent to reclassification, CPA(R):12's share of income from
Del Monte and ShopRite is recorded as equity income. The reclassification has no
effect on the overall contribution to cash flows or net income. For the year
ended December 31, 2002, the Del Monte and ShopRite interests contributed
$898,000 of equity income.
Lease revenues increased by $165,000, less than 1%. However, lease revenues
decreased as the result of the reclassification of the Del Monte and ShopRite
investments to the equity method. Lease revenues reflected $631,000 and
$2,040,000 from Del Monte and ShopRite in 2002 and 2001, respectively, for the
periods prior to the reclassification. As adjusted, lease revenues for the year
ended December 31, 2002 increased by $1,575,000, or 4%, primarily as 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. These increases were partially offset by a reduction of
$794,000 from the BAE Systems, Inc. property which was sold in May 2001. 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. In
2002, CPA(R):12 negotiated lease modifications with Randall International, Inc.
and International Management Consulting, Inc. ("IMCI"). Both the Randall and
IMCI lease amendments provide for short-term deferral of rent and establish a
schedule to systematically pay off the deferrals. More than 23 leases have rent
increases scheduled in 2003 and 2004. The majority of these rent increases are
CPI- based. The CPI has increased within a range of 1.5% and 3% over the past
several years. Intervals between rent increases range between one and five
years.
Substantially all of CPA(R):12's leases are long-term leases. A lease which
contributes annual rent of $397,000 is scheduled to expire in 2005; however, no
other long-term leases are scheduled to expire until 2009. CPA(R):12's Newark,
Delaware property has short-term leases with four tenants. In January 2003,
CPA(R):12 agreed to terminate its a lease with Rheometric Scientific, Inc. for a
property in Piscataway, New Jersey. Annual rent from the Rheometric lease was
approximately $900,000. In consideration for agreeing to the Rheometric lease
termination, CPA(R):12 received $2,250,000 (all of which is held by the mortgage
lender on the property) and may receive up to an additional $750,000. In
addition, the exercise price for 466,140 shares of common stock was reduced from
$2.00 per share to $0.01 and converted to 456,424 shares. CPA(R):12 was also
granted an additional 650,000 shares.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
CPA(R):12 is actively remarketing 100,000
square feet of the Piscataway property. Annual carrying costs on the property
are approximately $443,000. CPA(R):12 has already commenced remarketing the
Piscataway property, and there are several tenants under short-term leases.
Interest expense for the year ended December 31, 2002 increased by $812,000,
primarily from new mortgage loans in 2002 and 2001. Interest expense in 2001
included approximately $160,000 of interest from an advance on CPA(R):12's
credit facility as well as $715,000 of interest from loans on the Del Monte and
ShopRite properties which are now reflected in equity income. Interest expense
on previously unencumbered properties included in a mortgage securitization was
approximately $852,000 from August 2002, when the new financing was obtained. As
a result of obtaining $46,335,000 of new mortgage debt in connection with the
securitization, annual interest expense is projected to increase by $2,706,000
and annual debt service will increase by $3,164,000.
General and administrative expense in 2001 included a charge for writing off
business development costs of $382,000 which had previously been capitalized in
connection with proposed acquisitions. The capitalized costs were written off
when proposed acquisitions were not completed. Excluding this writeoff, general
and administrative expenses reflected a moderate increase. Property expense
increased due to an increase in CPA(R):12's provision for uncollected rents.
Management's evaluation of specific circumstances indicated the need to
strengthen existing allowance balances. While there is uncertainty in regard to
the collectibility of the Randall and IMCI deferred rents, the lease
modifications were granted to allow the lessees the ability to obtain new
capital or restructure their debt which, in turn, may allow the lessees to
recover from their financial difficulties. If the lessees' financial condition
improves, CPA(R):12 may receive all deferred amounts; however, there is no
assurance that such amounts will be received. The rent deferrals are not
expected to have a significant effect on CPA(R):12's operating cash flow or
liquidity, provided Randall and IMCI successfully restructure. Stated annual
rents from Randall and IMCI are $849,000 and $824,000, respectively. Under the
modification agreement with Randall, CPA(R):12 was granted warrants which are
convertible into a 5% interest in the company. Therefore, in consideration for
allowing a modification of lease terms, CPA(R):12 has an opportunity to realize
a benefit if Randall's financial condition stabilizes or improves.
The increase in interest and other income is the result of interest earned in
CPA(R):12's subordinated interest in the mortgage pool and higher average cash
balances. Management estimates that the effective rate of interest on the
mortgage obtained through the securitization, net of the estimated cash flow
from the interest in the mortgage trust, will be approximately 6.25%.
CPA(R):12' incurred extraordinary charges on the early extinguishment of debt of
$2,245,000, including $1,473,000 in connection with paying off certain loans
which were refinanced in connection with the mortgage securitization.
In December 2002, the Company acquired a 15% interest in three limited
partnerships which entered into net lease agreements with TruServ Corporation.
CPA(R):12's share of cash flow from its investment in the TruServ properties
will be approximately $985,000. In February 2003, CPA(R):12 also acquired a 15%
interest in a limited liability company that net leases 15 health clubs pursuant
to a master lease with Starmark Camhood LLC. Annual cash flow will be
approximately $1,200,000. The remaining interests are owned with two affiliates
which have substantially larger asset bases than CPA(R):12 and these
participations allow CPA(R):12 to invest in larger transactions while mitigating
the concentration of risk in any one lessee. CPA(R):12 also has $9,050,000 of
cash available for investment which it will likely use over the next twelve
months. A portion of these investments can be expected to be made with
affiliates.
The Advisor has structured several purchases of real estate for affiliates
outside of the United States, and on March 13, 2003, CPA(R):12 obtained an
equity interest from Corporate Property Associates 15 Incorporated in two net
lease transactions in France when CPA(R):12 bought a 35% interest in a limited
liability company that owns properties leased to Medica France, S.A. and
affiliates of Carrefour, S.A. The purchase price was based on the appraised
value of the properties (based on the current exchange for the Euro), adjusted
for capital costs incurred since the acquisitions including fees paid to the
Advisor, net of mortgage debt. Based on the formula, CPA(R):12 paid $11,916,000
and assumed an obligation for deferred fees payable of $1,031,000. Net of debt
service CPA(R):12's share of annual cash flow, from the properties (based on
current exchange rates) is approximately $1,950,000.
Because of the long-term nature of CPA(R):12's net leases, inflation and
changing prices have not unfavorably affected CPA(R):12's revenues and net
income. CPA(R):12's net leases generally have rent increases based on formulas
6
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
indexed to increases in the CPI, sales overrides or other periodic increases
which are designed to increase lease revenues in the future.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000
Net income for the year ended December 31, 2001 increased by $2,938,000 as
compared with the year ended December 31, 2000. Excluding the effect of gains of
$9,987,000 and $2,440,000 in 2001 and 2000, respectively, income would have
reflected a decrease of $4,609,000. The decrease in income was due to an
increase in general and administrative, interest and depreciation expenses and a
decrease in equity income, and was partially offset by an increase in lease
revenues and interest and other income. The decrease in equity income was due,
in part, to nonrecurring income recognized in 2000 by two equity investees as
described below.
The increase in general and administrative expense of $1,330,000 to $4,255,000
for 2001 was affected by investor-related costs and expenses incurred in
connection with business development (i.e., costs related to proposed
investments that were not completed). General and administrative expenses were
also affected by increased state taxes and personnel reimbursements.
Interest expense increased by $1,007,000 to $13,315,000 in 2001 primarily as a
result of obtaining $52,099,000 of new limited recourse mortgage financing in
connection with the purchases of the Galyan's Trading Company properties in 2000
and the Jen Coat and Orbseal properties in 2001 and obtaining mortgage debt in
2000 and 2001 on properties leased to Westell Technologies, Inc., Career
Education Corporation and Balanced Care Corporation which previously had been
unencumbered. The increase in depreciation was due to the purchase of properties
in 2000 and 2001 and the completion of construction of the Rave Reviews Cinema
LLC property, which was placed in service in January 2001.
Equity income decreased by $2,944,000 to $5,032,000 for the year ended December
31, 2001. Two equity investees hold interests in four properties that were
leased to Ameriserve Food Distribution, Inc. and in connection with their
bankruptcy claim against Ameriserve, letters of credit which had been issued to
the equity investees at the time the initial leases were entered into were
released into an escrow account in partial settlement of their bankruptcy claim.
Approximately $4,000,000 of equity income in 2000 reflected the amounts released
from the irrevocable letters of credit and related settlement income. All of the
properties formerly leased to Ameriserve are currently net leased. Net of the
effect of this item, equity income would have increased by $1,056,000 primarily
as the result of the acquisition of the interest in the Special Devices
properties. Equity income also benefited from fully re-leasing the former
Ameriserve properties and from a rent increase on the Upper Deck Company lease.
Effective October 1, 2001, CPA(R):12's tenancy-in-common interest in the Del
Monte properties was reclassified as an equity investment in connection with
contributing the properties to a jointly controlled entity. The reclassification
had no effect on net income but contributed $161,000 to equity income in 2001.
The increase in lease revenues of $948,000 to $45,246,000 in 2001 was due to
rent increases with nine existing lessees in 2001, the purchase of the
properties leased to Jen Coat and Orbseal and the commencement of rent from the
Rave Reviews property. The lease revenue increases, generally based on increases
in the CPI, were partially offset by the sale of a property in San Diego,
California formerly leased to BAE. The annual rent on the BAE property was
$2,121,000. The proceeds from the property were used to purchase the Jen Coat
and Orbseal properties and the interests in properties leased to Special
Devices, Inc. which provide aggregate annual rents of $4,184,000. The BAE sale
was structured as a tax-deferred noncash exchange.
The increase in interest and other income was primarily from interest earned on
the proceeds from the BAE sale which were placed in an escrow account in order
to complete a tax-free exchange and defer a taxable gain on the sale of the
property. The sales proceeds of $31,492,000 were deposited in an
interest-bearing restricted account held by an intermediary until used to
complete the tax-free exchange. During 2001, all of the proceeds were used.
CPA(R):12's results for 2001 included a realized gain of $8,869,000 from the
sale of the BAE property and an unrealized gain of $1,124,000 from owning
warrants for common stock of certain lessees. The gain represents the value
attributed to warrants for common stock of several lessees, primarily Vermont
Teddy Bear, Inc. and Rheometric that were granted to CPA(R):12 in connection
with structuring the initial lease transactions.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Financial Condition
Since December 31, 2001, CPA(R):12's cash and cash equivalents have increased by
$12,937,000 to $40,084,000 primarily as a result of obtaining new mortgage
financing in connection with the mortgage securitization. CPA(R):12 is using
these funds, except for amounts needed to meet working capital needs, to further
diversify its real estate portfolio.
One of CPA(R):12's primary objectives is to use the cash flow from its net
leases (including its equity investments) to fund an increasing rate of
dividends to shareholders and meet debt service requirements. Cash flow from
operations of $29,800,000, excluding $1,225,000 of prepayment premiums, and cash
flow from equity investments, which combined totaled $31,224,000, was sufficient
to pay dividends of $24,692,000, distributions of $1,444,000 to minority
interest partners and mortgage principal installments of $4,981,000. 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. Management
considers prepayment charges on extinguishment of debt as a financing cost and
incurs such charges only if it projects a benefit from refinancing. Therefore,
Management evaluates its ability to generate sufficient cash flow to meet
dividend objectives by evaluating its cash flows from equity investments with
cash flow from operating activities, net of prepayment charges.
CPA(R):12's investing activities included using $7,239,000 to purchase a
participation in the subordinated interest in the mortgage loan pool, $903,000
to fund an expansion at an existing facility leased to Celadon Group, Inc. and,
in December 2002, $13,164,000 to acquire a 15% interest in the partnerships that
net lease properties on to TruServ. One of the TruServ partnerships obtained a
limited recourse mortgage loan of $27,550,000 in January 2003 which, net of
costs, was distributed back to the partners, at which time CPA(R):12 received
approximately $4,133,000. In February 2003, CPA(R):12 also used $9,255,000 to
acquire a 15% interest in a newly-formed limited liability company that entered
into a sale-leaseback with Starmark Camhood, As of March 14, 2003, CPA(R):12 has
approximately $9,050,000 available for investment and expects to identify
suitable investments for this available cash over the next twelve months. In
January 2003, CPA(R):12 paid the Advisor $1,376,000 representing its annual
payment of deferred acquisition fees. Deferred acquisition fees are payable in
equal installments over no less than eight years in accordance with the advisory
agreement.
CPA(R):12 participated in a mortgage pool which 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.
Investment-grade interests representing $148,206,000 of the securitized mortgage
assets are owned by institutional investors and subordinated interests of
$24,129,000 were purchased by CPA(R):12 and its affiliates, with CPA(R):12
owning a 30% subordinated 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 included obtaining $44,776,000 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. The mortgage pool, a
non-traditional source of financing, enabled CPA(R):12 and its affiliates to
obtain more favorable lending terms such as a 7.5% annual interest rate on a
25-year amortization, than traditional corporate mortgage lenders provide on
properties such as supermarkets, movie theaters and health club properties. This
was accomplished by combining the loans in a mortgage trust pool and providing
institutional investors with an investment-grade rated security. 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. In January 2002,
CPA(R):12 used $10,000,000 from its $20,000,0000 credit line in connection with
funding the payoff of the mortgage loan on the Best Buy Co, Inc. 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
8
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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 December 31, 2002, no amounts are outstanding
under the facility.
CPA(R):12 has used the capital that it has raised from its public offerings
along with limited recourse mortgage financing as its primary source of
liquidity. A lender of limited recourse mortgage debt has recourse only to the
property and lease assignments collateralizing such debt and not to any of
CPA(R):12's other assets, while unsecured financing provides a lender recourse
to all of CPA(R):12's assets. The use of limited recourse mortgage debt,
therefore, allows CPA(R):12 to limit the exposure of all of its assets to any
one debt obligation. CPA(R):12's credit facility has been used to take advantage
of certain opportunities, such as paying off the Best Buy mortgage loan, which
was refinanced at a lower rate of interest, rather than to increase cash
reserves or fund dividends. CPA(R):12's loans generally have terms of at least
ten years, and no outstanding loans mature until 2005. In most instances,
CPA(R):12 will seek to refinance maturing or recently paid-off mortgage debt
with new property-level financing. Substantially all of CPA(R):12's mortgage
debt provides for a fixed rate of interest and there is no assurance that
existing debt will be refinanced at lower rates of interest as such debt
matures. Mortgage lenders have provisions in many of the loans which restrict
CPA(R):12's ability to prepay a loan or provide for payment of premiums if paid
prior to its scheduled maturity. A mortgage loan collateralized by a property
leased to Telos Coporation scheduled to mature in March 2003 was paid off in
January 2003, when CPA(R):12 made a balloon payment of $5,212,000 was paid to
satisfy the loan. CPA(R):12's financing activities also included using $
1,516,000 to purchase treasury stock and raising $1,158,000 of capital through
its dividend and share purchase plan.
Off-Balance Sheet and Aggregate Contractual Agreements
A summary of CPA(R):12's obligations under contractual arrangements as of
December 31, 2002 is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Limited recourse mortgage
notes payable $194,934 $10,749 $5,948 $10,443 $11,540 $24,560 $131,694
Deferred acquisition fees 6,256 1,275 1,338 1,210 1,013 619 801
Subordinated disposition fees 1,376 1,376
Share of minimum rents
payable under office
cost-sharing agreement 664 177 177 177 133 - -
-------- ------- ------ ------- ------- ------- -------
$203,230 $12,201 $7,463 $11,830 $12,686 $25,179 $133,871
======== ======= ====== ======= ======= ======= ========
In connection with the purchase of its properties, CPA(R):12 requires the
sellers to perform environmental reviews. Management believes, based on the
results of such reviews, that CPA(R):12's properties were in substantial
compliance with Federal and state environmental statutes at the time the
properties were acquired. However, portions of certain properties have been
subject to some degree of contamination, principally in connection with either
leakage from underground storage tanks, surface spills from facility activities
or historical on-site activities. In most instances where contamination has been
identified, tenants are actively engaged in the remediation process and
addressing identified conditions. Tenants are generally subject to environmental
statutes and regulations regarding the discharge of hazardous materials and any
related remediation obligations. In addition, CPA(R):12's leases generally
require tenants to indemnify CPA(R):12 from all liabilities and losses related
to the leased properties with provisions of such indemnification specifically
addressing environmental matters. The leases generally include provisions which
allow for periodic environmental assessments, paid for by the tenant, and allow
CPA(R):12 to extend leases until such time as a tenant has satisfied its
environmental obligations. Certain of the leases allow CPA(R):12 to require
financial assurances from tenants such as performance bonds or letters of credit
if the costs of remediating environmental conditions are, in the estimation of
CPA(R), in excess of specified amounts. Accordingly, Management believes that
the ultimate resolution of any environmental matter will not have a material
adverse effect on CPA(R):12's financial condition, liquidity or results of
operations.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued 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 initiated after June 30,
2001 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 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 and the accounting for asset
acquisitions. The provisions of SFAS No. 142 are effective for fiscal years
beginning after December 15, 2001 and must be adopted at the beginning of a
fiscal year. SFAS No. 142 provides that goodwill and indefinite-lived intangible
assets will no longer be amortized but will be tested for impairment at least
annually. Intangible assets acquired and liabilities assumed in business
combinations will only be amortized if such assets or 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 142 did not have a
material effect on CPA(R):12's financial statements.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. CPA(R):12 does not expect SFAS No. 143 to have a material effect on
its 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 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 144 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
must be presented as a discontinued operation for all periods presented.
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
10
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. CPA(R):12 does not have any employees nor any stock-based
compensation plans.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require
CPA(R):12 to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
accounting provisions only apply for certain new transactions and the
modification of existing guarantee contracts entered into after December 31,
2002. The adoption of the accounting provisions of FIN 45 is not expected to
have a material effect on CPA(R):12's financial statements.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE to make additional disclosures. The transitional disclosures
requirements will take effect almost immediately and are required for all
financial statements initially issued after January 31, 2003. CPA(R):12 is
assessing the impact of this interpretation on its accounting for its
investments in unconsolidated joint ventures and does not expect FIN 46 to have
a material effect on its financial statements. CPA(R):12's maximum loss exposure
is the carrying value of its equity investments.
11
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Corporate Property Associates 12 Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Corporate Property
Associates 12 Incorporated and its subsidiaries at December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of Carey Asset Management Corp. (the
"Advisor"); our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the Advisor, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2003
12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
---- ----
ASSETS:
Real estate leased to others: Accounted for under the operating
method:
Land $ 52,710,371 $ 50,710,371
Buildings 297,713,891 291,070,443
------------ ------------
350,424,262 341,780,814
Less, accumulated depreciation 34,815,471 27,327,123
------------ ------------
315,608,791 314,453,691
Net investment in direct financing leases 24,987,051 41,380,912
Equity investments 70,551,264 54,785,770
Cash and cash equivalents 40,084,470 27,147,331
Marketable securities 7,510,030 -
Other assets, net of allowance for uncollected rents of
$1,066,396 and $616,396 in 2002 and 2001 and accumulated
amortization of $790,420 and $563,204 in 2002 and 2001 13,386,909 9,473,400
------------ ------------
Total assets $472,128,515 $447,241,104
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS'
EQUITY:
Liabilities:
Limited recourse mortgage notes payable $194,933,811 $165,889,240
Accrued interest 1,098,917 966,879
Accounts payable and accrued expenses 2,170,744 1,272,293
Due to affiliates 2,843,060 2,907,240
Deferred acquisition fees payable to affiliate 6,255,973 7,218,587
Dividends payable 6,223,080 6,148,332
Prepaid rental income and security deposits 5,059,112 4,007,424
------------ ------------
Total liabilities 218,584,697 188,409,995
------------ ------------
Minority interest 7,937,305 7,907,437
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares;
issued and outstanding, 30,878,338 and 30,482,330 and
shares at December 31, 2002 and 2001 30,878 30,482
Additional paid-in capital 278,735,372 274,728,437
Dividends in excess of accumulated earnings (26,441,642) (18,325,307)
Accumulated other comprehensive income 307,999 -
------------ ------------
252,632,607 256,433,612
Less, treasury stock at cost, 747,252 and 592,930 shares at
December 31, 2002 and 2001 (7,026,094) (5,509,940)
------------ ------------
Total shareholders' equity 245,606,513 250,923,672
------------ ------------
Total liabilities and shareholders' equity $472,128,515 $447,241,104
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31,
-------------------------------
2002 2001 2000
---- ---- ----
Revenues:
Rental income $41,262,646 $40,048,640 $39,188,496
Interest income from direct financing leases 4,149,082 5,197,590 5,110,187
Interest and other income 1,267,846 804,542 627,854
----------- ----------- -----------
46,679,574 46,050,772 44,926,537
----------- ----------- -----------
Expenses:
Interest expense 14,126,475 13,314,629 12,307,768
Depreciation 7,488,348 7,432,476 7,373,672
General and administrative 4,026,231 4,255,364 2,925,151
Property expense 7,149,719 6,726,705 6,522,132
----------- ----------- -----------
32,790,773 31,729,174 29,128,723
----------- ----------- -----------
Income before minority interest, income from equity
investments, gain (loss) and extraordinary charge 13,888,801 14,321,598 15,797,814
Minority interest in income (1,473,948) (1,393,297) (1,205,530)
----------- ----------- -----------
Income before income from equity investments, gain
(loss) and extraordinary charge 12,414,853 12,928,301 14,592,284
Income from equity investments 6,927,217 5,032,221 7,977,028
----------- ----------- -----------
Income before gains (losses) and extraordinary charge 19,342,070 17,960,522 22,569,312
Gain on sales of securities - - 1,239,161
Gain on sales of real estate 8,863,709 1,201,121
Unrealized (loss) gain on warrants (446,541) 1,123,500 -
----------- ----------- -----------
Income before extraordinary charge 18,895,529 27,947,731 25,009,594
Extraordinary charge on early extinguishment of debt
(including $960,602 of equity investee) (2,245,111) - -
----------- ----------- -----------
Net income $16,650,418 $27,947,731 $25,009,594
=========== =========== ===========
Basic and diluted income per common share before
extraordinary charge $.63 $.94 $.87
Extraordinary charge (.08) - -
---- ---- ---
Basic and diluted income per common share $.55 $.94 $.87
==== ==== ====
Weighted average shares outstanding-basic and diluted 30,038,268 29,763,716 28,685,975
=========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
14
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENT of SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 2001, and 2002
Dividends in
Excess Accumulated
Common Additional Comprehensive of Accumulated Other Comprehen-
Stock Paid-in Capital Income Earnings sive Income Treasury Stock Total
Balance at
January 1, 2000 $28,909 $259,581,829 $(23,346,983) $ 483,269 $(2,496,945) $234,250,079
260,216 shares issued,
net of costs 260 2,239,267 2,239,527
Dividends declared (23,454,548) (23,454,548)
Comprehensive income:
Net income $25,009,594 25,009,594 25,009,594
Other comprehensive
income:
Change in unrealized
appreciation
resulting from sale
of securities (483,269) (483,269) (483,269)
-----------
$24,526,325
Repurchase of 252,376 ===========
shares (2,468,422) (2,468,422)
------- ------------ ------------ ---------- ----------- ------------
Balance at
December 31, 2000 29,169 261,821,096 (21,791,937) -- (4,965,367) 235,092,961
1,313,015 shares issued,
net of costs 1,313 12,907,341 12,908,654
Dividends declared (24,481,101) (24,481,101)
Comprehensive income:
Net income $27,947,731 27,947,731 27,947,731
===========
Repurchase of 55,503
shares (544,573) (544,573)
------- ------------ ------------ ---------- ----------- ------------
Balance at
December 31, 2001 30,482 274,728,437 (18,325,307) -- (5,509,940) 250,923,672
396,008 shares issued,
net of costs 396 4,006,935 4,007,331
Dividends declared (24,766,753) (24,766,753)
Comprehensive income:
Net income $16,650,418 16,650,418 16,650,418
Change in unrealized
gain on marketable
securities 307,999 307,999 307,999
-----------
$16,958,417
Repurchase of 154,322 ===========
shares (1,516,154) (1,516,154)
------- ------------ ------------ ---------- ----------- ------------
Balance at
December 31, 2002 $30,878 $278,735,372 $(26,441,642) $ 307,999 $(7,026,094) $245,606,513
======= ============ ============ ========== =========== ============
The accompanying notes are an integral part of the
consolidated financial statements.
15
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS
For the year ended December 31,
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 16,650,418 $ 27,947,731 $ 25,009,594
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,742,501 7,641,475 7,947,037
Straight-line rent adjustments (1,402,501) (1,131,902) (1,272,377)
Minority interest in income 1,473,948 1,393,297 1,205,530
Income from equity investments in excess of
distributions received (628,807) (814,795) (3,563,131)
Extraordinary charge on extinguishment of debt
(including $960,602 by equity investees) 2,245,111
Issuance of stock in satisfaction of performance fees 2,849,209 2,755,791 2,654,541
Gain on sales of real estate and securities -- (8,863,709) (2,440,282)
Noncash settlement income (371,294) -- --
Unrealized loss (gain) on warrants 446,541 (1,123,500) --
Change in operating assets and liabilities, net 794,995 (1,233,694) 411,711
------------ ------------ ------------
Net cash provided by continuing operations 29,800,121 26,570,694 29,952,623
Prepayment premium on extinguishment of debt (1,225,092) -- --
------------ ------------ ------------
Net cash provided by operating activities 28,575,029 26,570,694 29,952,623
------------ ------------ ------------
Cash flows from investing activities:
Capital distributions received from equity investments 1,766,449 13,145,242 4,195,380
Equity distributions received in excess of equity income 1,424,304 2,522,721 829,784
Proceeds from sales of real estate and securities 2,836,800 -- 15,751,800
Payment of deferred acquisition fees (1,375,711) (1,214,073) (1,044,191)
Purchases of real estate and equity investments
and other capitalized costs (13,830,912) (5,420,821) (18,634,311)
Purchase of securities (10,075,422) -- --
------------ ------------ ------------
Net cash (used in) provided by investing activities (19,254,492) 9,033,069 1,098,462
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid (24,692,005) (24,204,541) (23,435,295)
Payments of mortgage principal (4,981,330) (4,415,958) (3,997,993)
Prepayment of mortgages payable (8,908,195) (8,786,509) (7,370,926)
Payment of note payable -- (4,300,000) --
Advances on line of credit 10,000,000 -- 4,300,000
Repayments of advanced on credit facility (10,000,000) -- --
Proceeds from issuance of mortgages (a) 44,776,210 23,510,836 12,000,000
Payment of financing costs and mortgage deposit (775,966) (983,436) (307,331)
Costs of raising capital -- (276,030) (415,014)
Proceeds from issuance of shares 1,158,122 10,428,893 --
Capital (distributions to) contributions from minority
partner -- (15,003,000) 483,822
Distributions to minority partners (1,444,080) (1,555,435) (1,014,054)
Purchase of treasury stock (1,516,154) (544,573) (2,468,422)
------------ ------------ ------------
Net cash provided by (used in) financing activities 3,616,602 (26,129,753) (22,225,213)
------------ ------------ ------------
Net increase in cash and cash equivalents 12,937,139 9,474,010 8,825,872
Cash and cash equivalents, beginning of year 27,147,331 17,673,321 8,847,449
------------ ------------ ------------
Cash and cash equivalents, end of year $ 40,084,470 $ 27,147,331 $ 17,673,321
============ ============ ============
- continued -
16
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Noncash investing and financing activities:
a. Net of $1,559,055 held back from proceeds of mortgages by a mortgage
lender to fund certain escrow accounts.
In connection with the acquisition of properties in 2000, the Company assumed
mortgage payable obligations of $16,588,659.
During 2001, proceeds from the sale of a property of $30,492,012 were placed
in an escrow account and were subsequently released in connection with
the purchase of additional real estate.
Included in the cost basis of real estate investments acquired in 2002, 2001,
and 2000 are deferred acquisition fees payable of $413,096, $942,283 and
$622,816, respectively.
In connection with contributing tenancy-in-common interests to jointly-owned
entities in 2002 and 2001, assets and liabilities were reclassified as an
equity investment as follows:
2002 2001
----------- ----------
Real estate assets $ 8,814,224 $9,232,911
Mortgage note payable (3,029,875) --
Other assets and liabilities, net 340,014 --
----------- ----------
Equity investment $ 6,124,363 $9,232,911
=========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
17
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of
Corporate Property Associates 12 Incorporated, its wholly-owned
subsidiaries and a controlling interest in a majority-owned
limited liability company (collectively, the "Company"). All
material inter-entity transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant
estimates relate to the assessment of the recoverability of real
estate assets and investments. Actual results could differ from
those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the
tenant is generally responsible for all operating expenses
relating to the property, including property taxes, insurance,
maintenance, repairs, renewals and improvements. For the year
ended December 31, 2002, net lessees were responsible for the
direct payment of real estate taxes of approximately $5,346,000.
Expenditures for maintenance and repairs including routine
betterments are charged to operations as incurred. Significant
renovations which increase the useful life of the properties are
capitalized.
The Company diversifies its real estate investments among various
corporate tenants engaged in different industries, by property
type and geographically.
The leases are accounted for under either the direct financing or
operating methods. Such methods are described below.
Direct financing method - Leases accounted for under the
direct financing method are recorded at their net
investment (Note 6). Unearned income is deferred and
amortized to income over the lease terms so as to produce a
constant periodic rate of return on the Company's net
investment in the lease.
Operating method - Real estate is recorded at cost less
accumulated depreciation, minimum rental revenue is
recognized on a straight-line basis over the term of the
leases, and expenses (including depreciation) are charged
to operations as incurred.
When events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable, the Company
assesses the recoverability of its long-lived assets, including
residual interests of real estate assets and investments, based on
projections of undiscounted cash flows, without interest charges,
over the life of such assets. In the event that such cash flows
are insufficient, the assets are adjusted to their estimated fair
value. Residual values of direct financing leases are reviewed at
least annually. If a decline in the estimated residual value is
other than temporary, the accounting for the direct financing
lease will be revised using the changed estimate. The resulting
reduction in the net investment in the direct financing lease is
recognized as a loss in the period in which the estimate is
changed.
Substantially all of the Company's leases provide for either
scheduled rent increases, periodic rent increases based on
formulas indexed to increases in the Consumer Price Index ("CPI")
or sales overrides. Rents from sales overrides (percentage of
sales rents) are recognized as reported by lessees, that is, after
the level of sales requiring a rental payment to the Company is
reached.
18
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For properties under construction, operating expenses including
interest charges are capitalized and rentals received are recorded
as a reduction of capitalized project (i.e., construction) costs.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of properties - generally 40 years.
Equity Investments:
The Company's interests in entities in which its ownership
interests are to 50% or less, and has the ability to exercise
significant influence are accounted for under the equity method,
i.e. at cost, increased or decreased by the Company's share of
earnings or losses, less distributions.
Cash and Cash Equivalents:
The Company considers all short-term, highly liquid investments
that are both readily convertible to cash and have a maturity of
generally three months or less at the time of purchase to be cash
equivalents. Items classified as cash equivalents include
commercial paper and money market funds. At December 31, 2002 and
2001, the Company's cash and cash equivalents were held in the
custody of two financial institutions, and which balances at
times exceed federally insurable limits. The Company mitigates
this risk by depositing funds with major financial institutions.
Marketable Securities:
Marketable securities are classified as available for sale
securities and reported at fair value with the Company's interest
in unrealized gains and losses on these securities reported as a
component of other comprehensive income (loss) until realized.
Such marketable securities had a cost basis of $7,202,031 and
reflected a fair value of $7,510,030 at December 31, 2002. The
Company held no marketable securities at December 31, 2001.
Other Assets:
Included in other assets are deferred charges and deferred rental
income. Deferred charges are costs incurred in connection with
mortgage financings and refinancings and are amortized over the
terms of the mortgages and included in interest expense in the
accompanying consolidated financial statements. Deferred rental
income is the aggregate difference for operating leases between
scheduled rents which vary during the lease term and rent
recognized on a straight-line basis.
Derivative Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities"
became effective in 2001 and established accounting and reporting
standards for derivative instruments. Certain stock warrants
which were granted to the Company by lessees in connection with
structuring the initial lease transactions are defined as
derivative instruments because such stock warrants are readily
convertible to cash or provide for net settlement upon
conversion. Pursuant to SFAS No. 133, changes in the fair value
of such derivative instruments as determined using an option
pricing model are recognized currently in earnings as gains or
losses. As of December 31, 2002 and 2001, the Company recognized
an unrealized loss of $446,541 and an unrealized gain of
$1,123,500, respectively on warrants issued to the Company by
Rheometric Scientific, Inc. ("Rheometric"), Vermont Teddy Bear
Co., Inc., Sentry Technology Corporation and Randall
International, Inc. Subsequent to December 31, 2002, the Company
exercised its warrants in Rheometric and currently owns 1,106,424
shares of Rheometric common stock. The Rheometric common stock
will be accounted for as an available-for-sale marketable
security. The Company also holds certain stock warrants which are
not defined as derivative instruments and have been recorded at
nominal values. The Company has only recognized unrealized gains
or losses on stock warrants that are derivative instruments.
19
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Costs of Raising Capital:
Costs incurred in connection with the raising of capital through
the sale of common stock are charged to shareholders' equity upon
the issuance of shares.
Treasury Stock:
Treasury stock is recorded at cost.
Deferred Acquisition Fees:
Fees are payable for services provided by W.P. Carey & Co. LLC
and its wholly-owned subsidiary, Carey Asset Management Corp.
(collectively the "Advisor") to the Company relating to the
identification, evaluation, negotiation, financing and purchase
of properties. A portion of such fees are deferred and are
payable in annual installments with each installment equal to
.25% of the purchase price of the properties over no less than
eight years following the first anniversary of the date a
property was purchased.
Earnings Per Share:
The Company has a simple equity capital structure with only
common stock outstanding. As a result, the Company has presented
basic per-share amounts only for all periods presented in the
accompanying consolidated financial statements.
Federal Income Taxes:
The Company is qualified as a real estate investment trust
("REIT") as of December 31, 2002 as defined under the Internal
Revenue Code of 1986. The Company is not subject to Federal
income taxes on amounts distributed to shareholders provided it
distributes at least 90% of its REIT taxable income to its
shareholders and meets certain other conditions.
Operating Segments:
Accounting standards have been established for the way public
business enterprises report selected information about operating
segments and guidelines for defining the operating segments of an
enterprise. Based on the standards' definition, the Company has
concluded that it engages in a single operating segment.
Reclassification:
Certain prior year amounts have been reclassified to conform
to the current year's financial statement presentation.
2. Organization and Offering:
The Company was formed on July 30, 1993 for the purpose of engaging in
the business of investing in and owning industrial and commercial real
estate. Subject to certain restrictions and limitations, the business of
the Company is managed by the Advisor.
An initial offering of the Company's shares which commenced on February
18, 1994 concluded on January 26, 1996, at which time the Company had
issued an aggregate of 8,135,992 shares ($81,359,920). On February 2,
1996, the Company commenced an offering for a maximum of 20,000,000
shares of common stock. The shares were offered to the public on a "best
efforts" basis at a price of $10 per share. On August 22, 1997, the
Company registered an additional 300,000 shares. The second offering was
concluded on September 18, 1997, by which time 20,198,459 ($201,984,590)
shares were issued.
20
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the
Advisory Agreement between the Company and the Advisor provides that the
Advisor receive asset management and performance fees, each of which are
1/2 of 1/% of Average Invested Assets as defined in the Advisory
Agreement. The performance fee is subordinated to the Preferred Return,
a cumulative non-compounded dividend return of 7%. The Advisor has
elected at its option to receive the performance fee in restricted
shares of common stock of the Company rather than cash. The Advisor is
also reimbursed for the actual cost of personnel needed to provide
administrative services necessary to the operation of the Company. The
Company incurred asset management fees of $2,847,951, $2,782,154, and
$2,723,011 in 2002, 2001, and 2000 respectively, with performance fees
in like amount. The Company incurred personnel reimbursements of
$1,323,152, $1,289,852, $1,097,817 in 2002, 2001, and 2000,
respectively.
Fees are payable to the Advisor for services provided to the Company
relating to the identification, evaluation, negotiation, financing and
purchase of properties and refinancing of mortgages. A portion of such
fees are deferred and payable in equal installments over no less than
eight years following the first anniversary of the date a property was
purchased. Such deferred fees are only payable if the Preferred Return
has been met. The unpaid portion of the deferred fees bears interest at
an annual rate of 7% from the date of acquisition of a property until
paid. For transaction, and refinancings that were completed in 2002,
2001, and 2000, current fees were $770,458, $1,068,478 and $1,178,519,
respectively, and deferred fees were $413,097, $806,283 and $622,816,
respectively.
The Advisor is obligated to reimburse the Company for the amount by
which operating expenses of the Company exceeds the 2%/25% Guidelines
(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 the 2%/25% Guidelines,
the Advisor will have an obligation to reimburse the Company for such
excess, subject to certain conditions. Only if the Independent Directors
find that such excess expenses were justified based on any unusual and
nonrecurring factors which they deem sufficient, the Advisor may be paid
in future years for the full amount or any portion of such excess
expenses, but only to the extent that such reimbursement would not cause
the Company's operating expenses to exceed this limit in any such year.
Charges related to asset impairment, bankruptcy of lessees, lease
payment defaults, extinguishment of debt or uninsured losses are
generally not considered unusual and nonrecurring. A determination that
a charge is unusual and nonrecurring, such as the costs of significant
litigation that are not associated with day-to day operations, or
uninsured losses that are beyond the size or scope of the usual course
of business based on the event history and experience of the Advisor and
Independent Directors, is made at the sole discretion of the Independent
Directors. The Company will record any reimbursement of operating
expenses as a liability until any contingencies are resolved and will
record the reimbursement as a reduction of asset management and
performance fees at such time that a reimbursement is fixed,
determinable and irrevocable. The operating expenses of the Company have
not exceeded the amount that would require the Advisor to reimburse the
Company.
The Advisor will be entitled to receive subordinated disposition fees
based upon the cumulative proceeds arising from the sale of Company
assets since the inception of the Company, subject to certain
conditions. Pursuant to the subordination provisions of the Advisory
Agreement, the disposition fees may be paid only after the shareholders
receive 100% of their initial investment from the proceeds of asset
sales and a cumulative annual return of 6% (based on an initial share
price of $10) since the inception of the Company. The Advisor's interest
in such disposition fees amounts to $1,375,681 as of December 31, 2002.
Payment of such amount, however, cannot be made until the subordination
provisions are met. Management has concluded that payment of such
disposition fees is probable and all fees from completed property sales
have been accrued. Subordinated disposition fees are included in the
determination of realized gain or loss on the sale of properties. The
obligation for disposition fees is included in due to affiliates in the
accompanying consolidated financial statements.
The Company owns interests in entities which range from 15% to 50% and a
jointly-controlled 50% tenancy-in-common interest in a property subject
to a net lease with remaining interests held by affiliates. Controlling
interests in jointly-owned entities are consolidated and non-controlled
interests in which the Company has a significant interest are accounted
for under the equity method of accounting.
The Company is a participant in an agreement with certain affiliates for
the purpose of leasing office space used for the administration of real
estate entities and for sharing the associated costs. Pursuant to the
terms of the agreement, the Company's share of rental, occupancy and
leasehold improvement costs is based on gross revenues. Expenses
incurred
21
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in 2002, 2001, 2000 were $232,498, $232,481, and $234,774
respectively. The Company's current share of future minimum lease
payments is $663,000 through 2006.
4. Mortgage Financing Through Loan Securitization:
On August 28, 2002, The Company and three affiliates, W.P. Carey & Co.
LLC, Carey Institutional Properties Incorporated 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.
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.
The Company is accounting for its interest in the CPA(R) Interests as an
available-for-sale security and it is 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
December 31, 2002, the fair value of the Company's CPA(R) Interests was
$7,510,030, reflecting an unrealized gain of $307,999 and net
amortization of $36,591. 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 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 $1,225,092.
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:
22
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Annual Debt
Lease Obligor Loan Amount Service
- ------------- ----------- -------
Childtime Childcare, Inc. $4,677,496 $492,204
Garden Ridge Corporation 4,230,699 452,699
---------- --------
$8,908,195 $944,903
========== ========
The Company owns a 45% interest in two properties leased to ShopRite
Supermarkets, Inc. ("ShopRite") (formerly Big V Holding Corp.) with
CIP(R) owning the remaining interest. 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%.
The key variable in determining fair value of the CPA(R) Interests is
current interest rates. As required by SFAS No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities," a sensitivity analysis of the current value of the CPA(R)
Interests based on adverse changes in the market interest rates of 1%
and 2% is as follows:
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Interest rate 7.5% 8.5% 9.5%
Estimated fair value of CPA(R)Interests $7,510,030 $7,139,256 $6,794,603
The above sensitivity is hypothetical and changes in fair value based on
a 1% or 2% variation should not be extrapolated because the relationship
of the change in assumption to the change in fair value may not always
be linear.
5. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases amount to approximately; $38,079,000 in
2003; $38,570,000 in 2004, $38,157,000 in 2005, $38,361,000 in 2006,
$38,544,000 in 2007 and aggregate approximately $510,559,000 through
2021.
Contingent rents (including percentage rents and CPI-based increases)
were approximately $2,396,000, $1,938,000, and $746,000 in 2002, 2001,
and 2000 respectively.
6. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
2002 2001
---- ----
Minimum lease payments
receivable $35,954,860 $ 76,139,960
Unguaranteed residual value 24,987,051 40,599,760
----------- ------------
60,941,911 116,739,720
Less: unearned income 35,954,860 75,358,808
----------- ------------
$24,987,051 $ 41,380,912
=========== ============
23
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable direct financing leases are approximately $3,069,000 from
2003 through 2007 and aggregate approximately $35,955,000 through 2016.
Contingent rents (including CPI-based increases) were approximately,
$384,000, $274,000, and $194,000 in 2002, 2001 and 2000, respectively.
7. Mortgage Notes Payable and Line of Credit:
Mortgage notes payable, all of which are limited recourse to the
Company, are collateralized by an assignment of various leases and by
real property with a carrying value of approximately $323,139,000. As of
December 31, 2002, mortgage notes payable had fixed interest rates
ranging from 6.5% to 8.75% per annum and one loan with a variable
interest rate had an annual rate of 5.64% as of December 31, 2002.
Scheduled principal payments during each of the five years following
December 31, 2002 are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
- ------------------------ ------------ --------------- ------------------
2003 $ 10,748,753 $ 5,536,380 $5,212,373
2004 5,948,004 5,948,004
2005 10,442,621 10,442,621
2006 11,540,079 11,540,079
2007 24,560,420 24,560,420
Thereafter 131,693,934 131,693,934
------------ ------------ ----------
Total $194,933,811 $189,721,438 $5,212,373
============ ============ ==========
The Company has a $20,000,000 credit facility available to it for
investment opportunities and potential liquidity needs. As of December
31, 2002 there were no amounts outstanding under the credit facility.
The Company 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.
("Best Buy") which, in turn, was paid off from proceeds received from
the Best Buy refinancing. The credit agreement requires the Company 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 the Company and matures in
October 2003.
Interest paid, excluding capitalized interest, was $13,661,932,
$13,085,646, and $11,210,107 in 2002, 2001, and 2000 respectively. There
was no capitalized interest in 2002, 2001 and 2000.
8. Dividends:
Dividends paid to shareholders consist of ordinary income, capital
gains, return of capital or a combination thereof for income tax
purposes. For the three years ended December 31, 2002, dividends paid
per share reported for tax purposes were as follows:
2002 2001 2000
---- ---- ----
Ordinary income $.43 $.44 $.76
Capital gains - - .04
Return of capital .39 .38 .02
---- ---- ----
$.82 $.82 $.82
==== ==== ====
A dividend of $.2063 per share for the quarter ended December 31, 2002
($6,223,080) was declared in December 2002 and paid in January 2003.
24
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. 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 2002, 2001,and 2000 lease revenues are as follows:
2002 2001 2000
---- ---- ----
Per Statements of Income:
Rental income from operating leases $41,262,646 $40,048,640 $39,188,496
Interest income from direct financing leases 4,149,082 5,197,590 5,110,187
Adjustments:
Share of leasing revenues applicable to
minority interest (3,099,216) (3,071,528) (2,897,873)
Share of leasing revenues from equity
investments 16,360,259 13,206,572 11,465,450
----------- ----------- -----------
$58,672,771 $55,381,274 $52,866,260
=========== =========== ===========
In 2002, 2001, and 2000 the Company earned its share of net lease
revenues from its direct and indirect ownership of real estate from the
following lease obligors:
2002 % 2001 % 2000 %
----------- ----------- ----------- ----------- ----------- ---
Applied Materials, Inc. (a) $ 6,290,326 11% $ 6,238,516 11% $ 5,910,678 11%
Advanced Micro Devices, Inc. (b) 3,258,938 5 3,048,500 6 3,048,500 6
Galyan's Trading Company, Inc. 2,733,154 5 2,733,154 5 1,379,633 3
Perry Graphic Communications, Inc. and
Judd's Incorporated 2,191,567 4 2,191,567 4 2,191,567 4
Scott Companies, Inc. 2,062,281 3 2,062,281 4 2,052,162 4
Spectrian Corporation 2,040,246 3 2,015,521 4 2,000,433 4
Special Devices, Inc. (b) 1,962,000 3 1,118,967 2 -- --
Westell Technologies, Inc. 1,936,022 3 1,916,386 3 1,916,387 4
Best Buy Co., Inc. (b) 1,749,731 3 1,760,787 3 1,770,596 3
Career Education Corporation 1,736,808 3 1,736,808 3 1,742,437 3
Telos Corporation 1,634,969 3 1,543,258 3 1,543,258 3
Q Clubs, Inc. 1,541,135 3 1,470,319 3 1,421,582 3
PPD Development, Inc. 1,504,190 3 1,401,088 3 1,391,715 3
Sicor, Inc. (b) 1,472,736 2 1,472,736 3 1,472,736 3
The Upper Deck Company (b) 1,452,220 2 1,419,134 3 1,319,875 2
McLane Company, Inc. (b) 1,393,046 2 1,383,372 2 1,411,702 3
Compucom Systems, Inc. (b) 1,382,199 2 1,304,667 2 1,304,667 2
Del Monte Corporation (c) 1,381,982 2 1,286,250 2 1,286,250 2
Silgan Containers Corporation 1,348,177 2 1,275,000 2 1,275,000 2
The Bon-Ton Stores, Inc. 1,348,120 2 1,348,120 2 1,322,331 3
Textron, Inc. (b) 1,222,678 2 1,137,375 2 1,137,375 2
Jen-Coat, Inc. 1,210,000 2 457,111 1
Childtime Childcare, Inc. 1,190,074 2 1,190,074 2 1,184,234 2
ShopRite Supermarkets Inc. (formerly Big
V Holding Corporation.) (d) 1,083,738 2 1,075,406 2 1,068,008 2
Randall International, Inc. 1,039,351 2 779,230 1 779,230 1
Orbseal LLC 1,011,750 2 258,649 -- -- --
Pacific Logistics, L.P. 1,003,257 2 930,750 2 930,750 2
Garden Ridge Corporation 995,764 2 995,764 2 995,764 2
The Garden Companies, Inc. 920,292 2 920,292 2 868,346 2
Rheometric Scientific, Inc. 897,978 2 879,404 2 851,345 2
Other 7,678,042 14 8,030,788 14 9,289,699 17
----------- ----------- ----------- ----------- ----------- ---
$58,672,771 100% $55,381,274 100% $52,866,260 100%
=========== =========== =========== =========== =========== ===
(a) Net of amounts applicable to minority interests owned by Corporate Property
Associates 14 Incorporated
25
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b) Represents the Company's proportionate share of lease revenues from its
equity investment.
(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.
10. Equity Investments:
The Company owns interests in properties leased to corporations through
equity interests in various partnerships and limited liability companies
in which its ownership interests are 50% or less and the Company
exercises significant influence, and as tenants-in-common subject to
common control. The ownership interests range from 15% to 50%. All of
the underlying investments are owned with affiliates that have similar
investment objectives as the Company. The lessees are 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. 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 4). As described
below, the Company and two affiliates, CPA(R):14 and Corporate Property
Associates 15 Incorporated ("CPA(R):15") formed three limited
partnerships, and, on December 26, 2002 completed a transaction with
TruServ Corporation ("TruServ").
Distributions and allocations of income or loss from the equity
investees are based on ownership percentages and no fees are paid by the
Company or the partnerships to any of the general partners of the
limited partnerships.
Summarized combined financial information of the Company's equity
investees is as follows:
(In thousands) December 31,
------------
2002 2001
-------- -------
Assets (primarily real estate) $ 505,304 $353,674
Liabilities (primarily limited recourse mortgage
notes payable) 284,254 225,827
Capital 221,050 127,847
Year Ended December 31,
2002 2001 2000
--------- -------- -------
Revenues (primarily rental revenues) $ 39,758 $ 33,031 $39,412
Expenses (primarily interest on mortgages and
depreciation) 23,019 20,627 19,317
--------- -------- -------
Income before extraordinary charge 16,739 12,404 20,095
Extraordinary charge on early extinguishment
of debt (2,506) -- --
--------- -------- -------
Net income $ 14,233 $ 12,404 $20,095
========= ======== =======
A. In February 2002, the Best Buy 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. 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 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% based on a 25-year amortization schedule.
The loan matures in May 2012 at which time a balloon payment is scheduled.
As described in Note 4, the ShopRite limited partnership paid off an
existing mortgage loan in connection with the loan securitization. In
connection with paying off the existing loan, the limited partnership
incurred a prepayment charge of which the Company's share of the charge is
$188,640.
The Company's share of prepayment charges from equity investees of
$960,602 is included in extraordinary charge on early extinguishment of
debt in the accompanying consolidated financial statements.
B. On December 26, 2002, the Company , CPA(R):14 and CPA(R):15, formed three
newly formed limited partnerships with ownership interests of 15%, 35% and
50% respectively, which purchased land and seven buildings located in
26
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Kingman, Arizona; Woodland, California; Jonesboro, Georgia; Kansas
City, Missouri; Springfield, Oregon; Fogelsville, Pennsylvania and
Corsicana, Texas for $131,678,450, and entered into three master net
leases with TruServ Corporation. The leases have initial terms of 20
years followed by one renewal term of nine years and 11 months and a
second renewal term of 10 years. The leases provide for aggregate
initial rent of $12,007,151, with stated annual increases.
In connection with the purchase of the properties, the limited
partnerships obtained limited recourse mortgage loans totaling
$76,654,821 (including $27,550,047 obtained in January 2003),
collateralized by deeds of trust on the properties, and lease
assignments. The loans provide for aggregate monthly payments of
interest and principal of $451,134, at an annual interest rate of
5.83% based on 30-year amortization schedules. The loans mature in
January and February 2013 at which time balloon payments are
scheduled.
11. Gains (Losses) on Sale of Real Estate and Securities:
2001
On May 1, 2001, the Company sold its property in San Diego, California
leased to BAE Systems, Inc. ("BAE") for $30,497,865, and recognized a
gain of $8,863,709. The BAE sale was structured as a noncash exchange
for tax purposes so that the proceeds from sale were placed in an escrow
and used in connection with additional real estate acquisitions in 2001.
2000
In January 2000, the Company sold 11,261 System, Inc. ("Etec") shares at
a gain of $778,946. In connection with structuring the Etec net lease in
1995, the Company received warrants in Etec which it subsequently
converted to shares of common stock after Etec became a public company.
The Company had previously realized a gain of $2,356,001 on the sales of
Etec shares. Etec was subsequently acquired by Applied Materials, Inc.
In February 1997, the Company purchased land and building in Mobile,
Alabama and entered into a net lease agreement with QMS, Inc. ("QMS").
In June 2000, the Company sold the QMS property for $14,479,000 and
recognized a gain on sale of $1,201,121. In November 2000, the Company
converted QMS warrants for QMS common stock it received in connection
with structuring the QMS lease for 100,000 shares of QMS and sold the
shares at a gain of $269,215.
In connection with structuring its net lease with Texas Freezer Company,
Inc. ("Texas Freezer") in September 1997, the Company was granted
warrants to purchase 30,390 shares of Texas Freezer. In June 2000, Texas
Freezer sold substantially all of its assets to Pacific Logistics, L.P.
and P&O Cold Logistics, LLC. In connection with the sale, Texas Freezer
was required to satisfy the rights of warrant holders. Accordingly, the
Company recognized a gain of $191,000 in connection with receiving a
payment in satisfaction of its rights.
12. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage notes payable was
approximately $201,892,000 and $166,984,000 at December 31, 2002 and
2001, respectively. The fair value of the mortgage notes payable was
evaluated using a discounted cash flow model with a rate that takes into
account the credit of the tenant and interest rate risk.
13. Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
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 initiated after
June 30, 2001 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-
27
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interests method for business combinations is no longer permitted. The
adoption of SFAS 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 and the accounting for
asset acquisitions. The provisions of SFAS No. 142 are effective for
fiscal years beginning after December 15, 2001 and must be adopted at the
beginning of a fiscal year. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets will no longer be amortized but will be
tested for impairment at least annually. Intangible assets acquired and
liabilities assumed in business combinations will only be 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 142 did not have a material effect on
the Company's financial statements.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the
recognition and measurement of an asset retirement obligation. SFAS No.
143 requires retirement obligations associated with tangible long-lived
assets to be recognized at fair value as the liability is incurred with a
corresponding increase in the carrying amount of the related long-lived
asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not expect
SFAS No. 143 to have a material effect on its 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 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 144 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 must be presented as a
discontinued operation for all periods presented.
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS
No. 123, Accounting for Stock Based Compensation. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock based compensation (i.e., recognition
of a charge for issuance of stock options in the determination of
income.). However, SFAS No. 148 does not permit the use of the original
SFAS No. 123 prospective method of transition for changes to the fair
value based method made in fiscal years beginning after December 15, 2003.
In addition, this Statement
28
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation, description of
transition method utilized and the effect of the method used on reported
results. The transition and annual disclosure provisions of SFAS No. 148
are to be applied for fiscal years ending after December 15, 2002. The
Company does not have any employees nor any stock-based compensation
plans.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45") which changes the
accounting for, and disclosure of certain guarantees. Beginning with
transactions entered into after December 31, 2002, certain guarantees are
required to be recorded at fair value, which is different from prior
practice, under which a liability was recorded only when a loss was
probable and reasonably estimable. In general, the change applies to
contracts or indemnification agreements that contingently require the
Company to make payments to a guaranteed third-party based on changes in
an underlying asset, liability, or an equity security of the guaranteed
party. The accounting provisions only apply for certain new transactions
and modifications of exiting guarantee contracts entered into after
December 31, 2002 to the adoption of the accounting provisions of FIN 45
is not expected to have a material effect on the Company's financial
statements.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), the primary objective of which
is to provide guidance on the identification of entities for which control
is achieved through means other than voting rights ("variable interest
entities" or "VIEs") and to determine when and which business enterprise
should consolidate the VIE (the "primary beneficiary"). This new model
applies when either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without additional
financial support. In addition, FIN 46 requires both the primary
beneficiary and all other enterprises with a significant variable interest
in a VIE make additional disclosures. The transitional disclosures
requirements will take effect almost immediately and are required for all
financial statements initially issued after January 31, 2003. The Company
is assessing the impact of this interpretation on its accounting for its
investments in unconsolidated joint ventures and believes the adoption
will not have a material effect on the Company's financial statements. The
Company's maximum loss exposure is the carrying value of its equity
investments.
29
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Selected Quarterly Financial Data (unaudited):
Three Months Ended
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-------------- ------------- ------------------ -----------------
Revenues $11,470,047 $11,521,075 $11,751,202 $11,937,250
Expenses 7,682,431 8,014,848 8,384,204 8,709,290
Income before extraordinary charge 4,968,815 4,382,728 4,899,363 4,644,623
Net income (1) 4,196,853 4,382,728 3,426,214 4,644,623
Net income per share -
Basic and diluted .14 .15 .11 .15
Dividends declared per share .2057 .2059 .2061 .2063
(1) Includes extraordinary charge on early extinguishment of debt of
$(771,962) and $(1,473,149) for the three month period ended March 31,
2002 and September 30, 2002, respectively. Includes unrealized (loss)
gain on warrants of $(81,043), $(413,103), $100,140 and $840,547 for
the three month period ended March 31, 2002, June 30, 2002, September
30, 2002 and December 31, 2002, respectively.
Three Months Ended
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
-------------- ------------- ------------------ -----------------
Revenues $11,839,746 $11,552,371 $11,428,321 $11,230,334
Expenses 7,430,630 8,003,991 8,073,224 8,221,329
Net income (1) 5,106,862 13,758,563 5,844,053 3,238,253
Net income per share -
Basic and diluted .17 .46 .20 .11
Dividends declared per share .2049 .2051 .2053 .2055
(1) Includes unrealized gain (loss) on warrants of $511,522, $1,656,128 and
$(1,044,150) for the three-month period ended June 30, 2001, September
30, 2001 and December 31, 2001, respectively. Includes gain (loss) on
sale of real estate of $8,865,093 and $(1,384) for the three-month
period ended June 30, 2001 and September 30, 2001, respectively.
15. Subsequent Events:
In October 2002, the Company and Rheometric entered into an agreement
that would allow Rheometric to terminate its lease for its facility in
Piscataway, New Jersey upon completion of an asset sale of one of its
lines of business. On January 16, 2003, Rheometric completed the sale
of its rheology instruments business to the Waters Corporation at which
time the lease termination agreement became effective. In connection
with the sale of the business to Waters, Rheometric changed its name to
Proterion Corporation.
Under the agreement, the Company received a payment of $2,250,000 (all
of which is held in escrow by the mortgage lender). In addition
$256,315 which had been held by the Company from a sale of excess land
at the Piscataway property and was to be released to Rheometric upon
satisfaction of certain conditions was retained. The termination
agreement also provides for payments to the Company of up to $750,000
over the next year.
In addition, the exercise price for warrants for 466,140 shares of
Rheometric common stock was reduced from $2.00 to $.01 per share and
were concurrently converted to 456,424 shares of common stock pursuant
to a cashless exercise. The Company has the right to sell such shares
at any time. The Company also received an additional 650,000 shares of
Rheometric common stock, the sale of which is subject to certain
restrictions. As of March 12, 2003, the per share closing price of
Proterion Corporation was $0.30.
On February 7, 2003, the Company, CPA(R):14 and CPA(R):15, through a
newly-formed limited liability company with ownership interests of 15%,
41% and 44%, respectively purchased land and 15 health club facilities
for $178,010,471
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and entered into a master net lease with Starmark Camhood, L.L.C.
("Starmark"). The lease obligations of Starmark are jointly
unconditionally guaranteed by seven of its affiliates.
The Starmark lease provides for an initial lease term of 20 years with
three ten-year renewal terms. Annual rent is initially $18,272,400 with
CPI-based increases scheduled in November 2006, 2010, 2014, 2018 and 2021.
$167,400 of annual rent will not be included in the determination of the
future rent increases.
In connection with the purchase, the limited liability company obtained
first mortgage limited recourse financing of $88,300,000 and a mezzanine
loan of $20,000,000. The first mortgage provides for monthly payments of
interest and principal of $563,936 at an annual interest rate of 6.6% and
based on a 30-year amortization schedule. The loan matures in March 2013
at which time a balloon payment is scheduled. The mezzanine loan provides
for monthly payments of interest and principal of $277,201 at an annual
interest rate of 11.15% and will fully amortize over its ten-year term.
The limited liability company was granted 5,276 warrants for Class C Unit
interests in Starmark and represent a 5% interest in the Company. The
warrants may be exercised at any time through February 7, 2023 at an
exercise price of $430 per unit. The warrant agreement does not provide
for a cashless exercise of units.
On March 12, 2003, the Company purchased a 35% interest in a limited
liability company from CPA(R):15 which retained the remaining 65%
interest. The limited liability company owns properties in France that are
leased to Medica-France, S.A. ("Medica") and affiliates of Carrefour, S.A.
("Carrefour"). The purchase price consisted of a payment of $11,916,465
and the assumption of a deferred fee payable to the Advisor of $1,031,046.
The purchase price was based on the appraised value of the properties
(based on the current exchange for the Euro) adjusted for capital costs
incurred since the acquisition by CPA(R):15 including fees paid to the
Advisor, net of mortgage debt. Based on the current exchange for the Euro,
the value used for Medica and Carrefour properties as of date of the
purchase of the 35% interests was $47,218,481 and $119,358,007,
respectively, inclusive of fees.
The Medica leases have a remaining term through June 2011 and provide for
aggregate annual rent of Euro 3,856,618 ($4,226,467 based on the current
exchange rate) with annual rent increases based on a formula indexed to
increases in the INSEE, a French construction cost index. The Carrefour
leases have a remaining term through December 2011 for an aggregate annual
rent of Euro 10,190,269 ($11,167,516) with annual rent increases based on
a formula, indexed to the INSEE.
In connection with the purchase of the properties, the limited liability
company obtained limited recourse mortgage debt of Euro 34,000,000
($37,260,600 as of the date of the acquisition of the 35% interest) and
Euro 84,244,000 ($92,323,000 as of the date of the acquisition of the 35%
interest) on the Medica and Carrefour properties, respectively. The Medica
and Carrefour loans provide for quarterly payments of interest at an
annual interest rate of 5.631% and 5.55%, respectively, and stated
principal payments with scheduled increases over their terms. The Medica
and Carrefour loans mature in October 2017 and December 2014,
respectively, at which time balloon payments are scheduled.
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MARKET FOR THE PARTNERSHIP'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the
Company.
As of December 31, 2002 there were 13,716 holders of record of the Shares
of the Company.
In accordance with the Prospectus of the Company, dividends will be paid
quarterly regardless of the frequency with which such dividends are
declared. The Company is required to distribute annually at least 90% of
its Distributable REIT Taxable Income to maintain its status as a REIT.
The following shows the frequency and amount of dividends paid for the
past three years.
Cash Dividends Paid Per Share
2002 2001 2000
---- ---- ----
First quarter $.2055 $.2047 $.2039
Second quarter .2057 .2049 .2041
Third quarter .2059 .2051 .2043
Fourth quarter .2061 .2053 .2045
----- ----- -----
$.8232 $.8200 $.8168
====== ====== ======
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and
without charge, a copy of the Annual Report on Form 10-K ("10-K") for the
year ended December 31, 2002 as filed with the Securities and Exchange
Commission ("SEC"). The 10-K may also be obtained through the SEC's EDGAR
database at www.sec.gov.
32