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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERDIO ENDED MARCH 31, 2003
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
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3726306
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
CPA(R):12 has SHARES OF COMMON STOCK registered pursuant to Section 12(g)
of the Act.
CPA(R):12 HAS NO SECURITIES registered on any exchanges.
CPA(R):12 does not have any Securities registered pursuant to Section
12(b) of the Act.
CPA(R):12 (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X[ No [ ].
CPA(R):12 has no active market for common stock at May 12, 2003.
CPA(R):12 has 30,164,041 shares of common stock, $.001 par value
outstanding at May 12, 2003.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of March 31, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 5-10
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. - Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. - Controls and Procedures 17
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20-21
* The summarized condensed financial statements contained herein is unaudited;
however, in the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included.
1
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Land and buildings, net of accumulated depreciation of $36,733,845 at
March 31, 2003 and $34,815,471 at December 31, 2002 $ 319,549,968 315,608,791
Net investment in direct financing leases 19,127,500 24,987,051
Equity investments 89,486,314 70,551,264
Cash and cash equivalents 15,791,040 40,084,470
Marketable securities 8,213,874 7,510,030
Other assets 15,801,152 13,386,909
------------- -------------
Total assets $ 467,969,848 $ 472,128,515
============= =============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 188,359,527 $ 194,933,811
Accrued interest 1,068,118 1,098,917
Accounts payable and accrued expenses 2,634,932 2,170,744
Due to affiliates 2,672,999 2,843,060
Deferred acquisition fees payable to affiliate 6,546,125 6,255,973
Dividends payable 6,240,696 6,223,080
Prepaid rental income and security deposits 5,041,645 5,059,112
------------- -------------
Total liabilities 212,564,042 218,584,697
------------- -------------
Minority interest 7,958,278 7,937,305
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares; issued and
outstanding 30,967,407 shares at March 31, 2003 and 30,878,338
shares at December 31, 2002 30,966 30,878
Additional paid-in capital 279,638,957 278,735,372
Dividends in excess of accumulated earnings (25,198,850) (26,441,642)
Accumulated other comprehensive income 314,904 307,999
------------- -------------
254,785,977 252,632,607
Less, treasury stock at cost, 779,489 shares at March 31, 2003 and
747,252 shares at December 31, 2002 (7,338,449) (7,026,094)
------------- -------------
Total shareholders' equity 247,447,528 245,606,513
------------- -------------
Total liabilities, minority interest and shareholders'
equity $ 467,969,848 $ 472,128,515
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements at that date.
2
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31,
-----------------------------------
2003 2002
------------ ------------
Revenues:
Rental income $ 10,655,487 $ 10,044,745
Interest income from direct financing leases 646,458 1,316,123
Interest and other income 3,233,480 109,179
------------ ------------
14,535,425 11,470,047
------------ ------------
Expenses:
Interest 3,807,950 3,363,944
Depreciation 1,918,374 1,851,885
General and administrative 976,256 893,131
Property expenses 2,432,650 1,573,471
------------ ------------
9,135,230 7,682,431
------------ ------------
Income before minority interest, equity investment and gain
(loss) 5,400,195 3,787,616
Minority interest in income (378,692) (363,878)
Income from equity investments including charge on early
extinguishment of debt of $771,962 in 2002 2,471,805 854,158
------------ ------------
Income before gain (loss) 7,493,308 4,277,896
Unrealized loss on warrants (9,820) (81,043)
Reversal of unrealized gain on warrants on conversion to shares (237,340) --
Gain on settlement of derivatives contract 237,340 --
------------ ------------
Net income $ 7,483,488 $ 4,196,853
============ ============
Basic and diluted income per common share
$ .25 $ .14
============ ============
Weighted average shares outstanding - basic and diluted 30,155,234 29,917,032
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
---------------------------------
2003 2002
----------- -----------
Net income $ 7,483,488 $ 4,196,853
Other comprehensive income:
Change in unrealized appreciation on marketable securities 161,053 --
Change in foreign currency translation adjustment (154,148) --
----------- -----------
6,905 --
----------- -----------
Comprehensive income $ 7,490,393 $ 4,196,853
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
-----------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 7,483,488 $ 4,196,853
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,060,656 1,921,449
Straight-line rent adjustments (341,096) (169,908)
Income from equity investments before charge in excess of
distributions received (586,042) (385,664)
Charge on extinguishment of debt by equity investees -- 771,962
Fees paid by issuance of stock 712,648 713,903
Minority interest in income 378,692 363,878
Unrealized loss on warrants 9,820 81,043
Reversal of unrealized gain on warrants on conversion to shares 237,340 --
Gain on settlement of derivatives contract (237,340) --
Lease termination proceeds assigned to lender (2,250,000) --
Securities received in connection with lease termination agreement (338,000) --
Change in operating assets and liabilities, net 137,047 (1,468,312)
------------ ------------
Net cash provided by operating activities 7,267,213 6,025,204
------------ ------------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 345,085 386,021
Purchases of real estate and equity investments and additional
capitalized costs (21,021,240) --
Distributions of mortgage financing from equity investee 3,738,075
Payment of deferred acquisition fees (1,274,925) (1,375,711)
------------ ------------
Net cash used in investing activities (18,213,005) (989,690)
------------ ------------
Cash flows from financing activities:
Prepayments of mortgage principal (5,199,405) --
Payments of mortgage principal (1,374,879) (1,206,975)
Amounts advanced on credit facility -- 10,000,000
Repayments of advances on credit facility -- (10,000,000)
Distributions to minority interest partner (357,719) (362,341)
Payment of financing costs and mortgage deposits (71,228) --
Proceeds from issuance of shares, net of costs 191,028 208,252
Dividends paid (6,223,080) (6,148,332)
Purchase of treasury stock (312,355) (141,119)
------------ ------------
Net cash used in financing activities (13,347,638) (7,650,515)
------------ ------------
Net decrease in cash and cash equivalents (24,293,430) (2,615,001)
Cash and cash equivalents, beginning of period 40,084,470 27,147,331
------------ ------------
Cash and cash equivalents, end of period $ 15,791,040 $ 24,532,330
============ ============
Noncash investing activity:
In connection with a lease termination, a net investment in a direct
financing lease with a carrying value of $5,859,551 was reclassified as
land and buildings.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of
Corporate Property Associates 12 Incorporated (the "Company") have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to
Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Transactions with Related Parties:
The Company's asset management and performance fees are payable to its Advisor,
Carey Asset Management Corp., a wholly-owned subsidiary of W. P. Carey & Co.
LLC, each of which is the per annum amount of 1/2 of 1% of Average Invested
Assets, as defined in the Company's Advisory Agreement. The Advisor has elected
at its option to receive the performance fee in restricted shares of common
stock rather than cash. The Advisor is also reimbursed for the actual cost of
personnel needed to provide administrative necessary to the operation of the
Company. The Company incurred asset management fees of $792,864 and $711,250 for
the three months ended March 31, 2003 and 2002, respectively, with performance
fees in like amount. For the three months ended March 31, 2003 and 2002, the
Company incurred personnel cost reimbursements of $357,212 and $311,563,
respectively.
Fees are payable to the Advisor in connection with services performed relating
to the identification, evaluation, financing and purchase of properties. In
connection with services performed relating to the identification, evaluation,
negotiation, financing and purchase of properties, current and deferred fees for
the three months ended March 31, 2003 were $667,539 and $534,031, respectively.
As described in Note 7, on March 12, 2003, the Company purchased a 35% interest
in thirteen properties from Corporate Property Associates 15 Incorporated
("CPA(R):15"), an affiliate. In connection with the purchase, the Company
assumed an obligation for 35% of the deferred acquisition fee payable to an
affiliate which was $1,031,046. The Company's cash portion of the purchase price
included reimbursement to CPA(R):15 for 35% of the initial current acquisition
fee which was $1,288,807.
Note 3. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust mortgage securitization as an available-for-sale marketable
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 March 31, 2003, the fair value of the Company's
interests was $7,793,433, reflecting an aggregate unrealized gain of $623,951
and cumulative net amortization of $69,140 ($32,549 for the three-months ended
March 31, 2003). The fair value of the Company's 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 key variable in determining fair value of the subordinated interest 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 interest based on adverse
changes in the market interest 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 the interests $ 7,793,433 $ 7,407,508 $ 7,048,617
5
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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.
Note 4. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
leasing revenues for the three-month periods ended March 31, 2003 and 2002 are
as follows:
2003 2002
------------ ------------
Per Statements of Income:
Rental income from operating leases $ 10,655,487 $ 10,044,745
Interest from direct financing leases 646,458 1,316,123
Adjustment:
Share of leasing revenue applicable to minority interest (774,426) (775,026)
Share of leasing revenue from equity investments 5,443,583 3,919,519
------------ ------------
$ 15,971,102 $ 14,505,361
============ ============
For the three-month periods ended March 31, 2003 and 2002, the Company earned
its net leasing revenues from its investments from the following lease obligors:
2003 % 2002 %
----------- ----------- ----------- -----------
Applied Materials, Inc. (a) $ 1,571,615 10% $ 1,572,994 11%
Advanced Micro Devices, Inc. (b) 814,734 5 814,734 6
Galyan's Trading Company 683,288 4 683,289 5
Perry Graphic Communications, Inc. and Judd's Incorporated 547,892 3 547,892 4
Scott Companies Inc. 542,282 3 515,570 4
TruServ Corporation 541,671 3 -- --
Spectrian Corporation 537,750 3 503,880 3
Westell Technologies, Inc. 495,927 3 479,097 3
Special Devices, Inc. (b) 490,500 3 490,500 3
Best Buy Co., Inc. (b) 436,189 3 439,121 3
Career Education Corporation 434,202 3 434,202 3
Telos Corporation 416,385 3 385,814 3
Starmark Holding LLC (b) 400,400 3 -- --
Q Clubs, Inc. 386,613 2 383,955 3
PPD Development, Inc. 376,047 2 376,047 3
Sicor, Inc. (b) 368,184 2 368,184 3
The Upper Deck Company (b) 363,055 2 363,055 2
Silgan Containers Corporation 355,338 2 318,750 2
Compucom Systems, Inc. (b) 352,011 2 326,167 2
McLane Company, Inc. (b) 350,360 2 346,601 2
Del Monte Corporation 341,906 2 321,563 2
The Bon-Ton Stores, Inc. 337,030 2 337,030 2
Childtime Childcare, Inc. 312,563 2 297,518 2
Textron, Inc. (b) 309,935 2 292,874 2
Jen-Coat, Inc. 302,500 2 302,500 2
Randall International, Inc. 265,749 2 206,496 1
Pacific Logistics, L.P. 254,834 2 250,814 2
Orbseal LLC 252,938 2 252,938 2
Garden Ridge Corporation 248,941 2 248,941 2
Other 2,880,263 19 2,644,835 18
----------- ----------- ----------- -----------
$15,971,102 100% $14,505,361 100%
=========== =========== =========== ===========
(a) Net of Corporate Property Associates 14 Incorporated's ("CPA(R):14")
minority interest.
(b) Represents the Company's proportionate share of lease revenues from
its equity investments.
6
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
For the three-month period ended March 31, 2003, lessees were responsible for
the direct payment of approximately $1,253,000 of real estate taxes on behalf of
the Company.
Note 5. Equity Investments:
The Company owns interests in properties leased to corporations through equity
interests in (i) various partnerships and limited liability companies in which
its ownership interests are 50% or less and the Company exercises significant
influence, and (ii) tenancies-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., ShopRite
Supermarkets, Inc., TruServ Corporation, Starmark Camhood LLC ("Starmark"),
Medica-France, S.A. ("Medica") and affiliates of Carrefour, S.A. ("Carrefour").
The equity investments in Starmark, Medica and Carrefour were acquired during
the quarter ended March 31, 2003 (see Note 7).
Summarized combined financial information of the Company's equity investees is
as follows:
(In thousands) March 31, 2003 December 31, 2002
- -------------- -------------- -----------------
Assets (primarily real estate) $870,974 $505,304
Liabilities (primarily mortgage notes payable) 570,199 284,254
Partners' and members' equity 300,775 221,050
Three months Ended March 31,
---------------------------
2003 2002
-------- --------
Revenues (primarily rental revenue) $ 20,466 $ 9,556
Expenses (primarily interest on mortgages and
depreciation) (11,809) (7,678)
-------- --------
Net income $ 8,657 $ 1,878
======== ========
Note 6. Lease Termination Agreement:
In October 2002, the Company and Rheometric Scientific, Inc. ("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, the Rheometric sale was completed
and at which time the lease termination agreement became effective and
Rheometric changed its name to Proterion Corporation ("Proterion").
Under the agreement, the Company received a payment of $2,250,000 (all of which
is held in escrow by the mortgage lender) and received 650,000 shares of
Proterion (which had a quoted per share price of $0.52 on the date of the
termination). In addition, $256,315 which had been held in escrow by the Company
on behalf of Rheometric upon was released to the Company. The termination
agreement also provides for payments to the Company of up to $750,000 over the
next year. The Company has recognized income, net of costs of $2,722,227 in
connection with the termination, and which is included in other income in the
accompanying condensed consolidated financial statements. As the additional
payments of up to $750,000 are subject to certain contingencies, such amounts
will be recognized as income only as the contingencies are removed.
In connection with structuring the initial purchase transaction with Rheometric,
the Company was granted warrants for 466,140 shares of Rheometric common stock
at an exercise price of $2.00. Under the lease termination agreement, the
exercise price of the warrants was reduced to $0.01. On January 16, 2003, the
warrants were converted on a cashless basis to 456,424 shares of common stock of
Proterion. Because the Company had the ability to convert the warrants to shares
on a cashless basis, the warrants had been classified as a derivative
instrument. Upon conversion to shares, a cumulative unrealized gain in the fair
value of the warrants of $237,340 was reversed and a realized gain of $237,340,
representing the gain on the settlement of a derivatives contract was
recognized. The Company's 1,106,424 shares of Proterion are classified as an
available-for-sale marketable security
7
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
and are measured at fair value with all gains and losses in fair value reported
as an component of other comprehensive income as part of shareholders' equity.
As of March 31, 2003, the quoted per share price of Proterion was $0.38.
Note 7. Acquisitions of Real Estate:
A. 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 and Carrefour. The purchase price for the 35% interest
was $11,916,465 in cash 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 March 6, 2003 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.
The Medica leases have a remaining term through June 2011 and provide for
aggregate annual rent of Euro 3,856,618 ($4,226,467) 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) 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 payable.
B. On February 7, 2003, the Company and two affiliates, 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. 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.
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 payable. 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 warrants for Class C Unit
interests in Starmark. If exercised, the Unit interests would represent a
5% interest in Starmark as of the date of grant. 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.
Note 8. Accounting Pronouncements:
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. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
8
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 Company adopted this Statement effective January
1, 2003, and the adoption did not have a material effect on the Company's
financial statements. The Company will no longer classify gains and losses for
the extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
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. SFAS No. 146 was adopted
on January 1, 2003, and did not 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. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
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
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on the Company's 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. The Company does not have any employees nor any stock-based
compensation plans.
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 Company's maximum loss
exposure is the carrying value of its equity investments. The Company has
evaluated the impact of this interpretation on its accounting for its
investments in unconsolidated joint ventures and it does not expect to
consolidate those investments as none of these investments will be classified as
VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain
9
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
derivative instruments embedded in other contracts, and for hedging under SFAS
No. 133. The changes in the statement improve financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. In
particular, the statement (1) clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a derivative instrument
discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an underlying to
conform it to language used in FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", and (4) amends certain other existing pronouncements. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The guidance is to
be applied prospectively.
10
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Corporate Property
Associates 12, Incorporated's ("CPA(R):12") condensed consolidated financial
statements and notes thereto as of March 31, 2003 included in this quarterly
report and CPA(R):12's Annual Report on Form 10-K for the year ended December
31, 2002. This quarterly report contains forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievement of
CPA(R):12 to be materially different from the results of operations or plans
expressed or implied by such forward looking statements. Accordingly, such
information should not be regarded as representations by CPA(R):12 that the
results or conditions described in such statements or the objectives and plans
of CPA(R):12 will be achieved. Item 1 of the Annual Report on Form 10-K for the
year ended December 31, 2002 provides a description of CPA(R):12's business
objectives, acquisition and financing strategies and risk factors which could
affect future operating results.
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 these accounting policies.
The preparation of financial statements requires that CPA(R):12 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 recognizes 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 measures its allowance against actual rent arrearages and adjusts the
percentage applied.
Operating real estate is stated at cost less accumulated deprecation. Costs
directly related to build-to-suit projects, primarily interest, if applicable
are capitalized. 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 in service 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 capitalizes those 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. 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.
11
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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
exercise. 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 of return 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.
CPA(R):12 and affiliates are investors in certain real estate assets. 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
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 non-cancelable 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
12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 written off and included in
charges for early extinguishment of debt if a loan is retired. 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 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:
Net income increased by $3,286,000 to $7,483,000 as compared with net income of
$4,197,000 for the three-month period ended March 31, 2002. Net income for the
three months ended March 31, 2003 includes $2,722,000 of other income from a
lease termination. Excluding the effects of the lease termination, and a charge
on extinguishment of debt of $772,000, in 2002, income would have reflected a
decrease of $208,000. The decrease in income was due to increases in interest
expense and property expense and was partially offset by increases in income
from equity investments and other interest income.
Interest expense increased by $444,000. Solely as a result of obtaining
$46,335,000 of limited recourse mortgage financing in August 2002 in connection
with the mortgage securitization transaction, annual interest expense is
projected to increase by approximately $2,700,000. The effect of this increase
has been partially offset by a decrease in interest expense due to increasing
mortgage amortization on existing fixed rate mortgage loans, the payoff of a
mortgage loan on the Telos Corporation property in January 2003 and the
reclassification of the ownership interests in properties leased to ShopRite
Supermarkets, Inc. to an equity investment in August 2002 and which are
encumbered by mortgage debt.
Property expense increased primarily due to an increase in property related
expenses from the Rheometric Scientific, Inc. property and the property leased
to Sentry Technology Corporation. Subsequent to the lease termination on the
Rheometric property, CPA(R):12 is remarketing 100,000 square feet at the
property. Annual carrying costs on the property are approximately $443,000. A
portion of the property is occupied by several tenants under short-term leases
which provide monthly rents of approximately $67,000. Although Sentry Technology
has an obligation pursuant to its net lease to pay property-related expenses,
its has not been able to meet this obligation, and CPA(R):12 has paid real
estate taxes on the property. While CPA(R):12 will attempt to recover the
amounts paid on behalf of Sentry Technology, CPA(R):12 believes that it is
unlikely that it will be reimbursed by the lessee, and, therefore, has charged
these advances to property expense. Property expenses also increased due to
moderate increases in the provision for uncollected rents and asset management
and performance fees.
13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Equity income increased primarily due to the acquisition of properties leased to
TruServ Corporation and Starmark Camhood, LLC in December 2002 and February
2003, respectively. CPA(R):12's estimated share of cash distributions from
TruServ and Starmark is approximately $2,215,000. In addition, CPA(R):12
purchased a 35% interest in a limited liability company from CPA(R):15 on March
12, 2003. The limited liability company owns properties in France that are
leased to Medica-France, S.A. and affiliates of Carrefour, S.A. CPA(R):12's
share of distributions from these French investments is $1,954,000. CPA(R):12
owns a 40% interest in a property in Grand Rapids, Michigan leased to Fleming
Companies, Inc. In March 2003, Fleming filed a petition of bankruptcy and in
connection with its plan of reorganization, the lease was terminated in May
2003. CPA(R):12's annual cash flow from the Fleming property was $355,000. The
increase in interest income is the result of $252,000 earned from CPA(R):12's
subordinated interest in the mortgage securitization. The increase in other
income was due to the $2,722,000 from the Rheometric lease termination
agreement.
There was no significant change in lease revenues for the comparable periods.
Excluding the effect of the reclassification of the ShopRite properties to an
equity investment, lease revenues increased by $198,000, as the result of rent
increases on thirteen leases.
FINANCIAL CONDITION:
There has been no material change in CPA(R):12's financial condition. Cash has
decreased by $24,293,000 primarily as a result of acquisitions and satisfying a
balloon payment obligation on a mortgage loan. CPA(R):12 is using its available
cash funds, except for amounts needed to meet working capital needs, to further
diversify its real estate portfolio. One of CPA(R):12's objectives is to use the
cash flow from net leases (including its equity investments) to meet operating
expenses, service its debt and fund an increasing rate of dividends to
shareholders. Cash flows from operations and equity investments of $7,612,000
were not sufficient to pay quarterly dividends of $6,223,000, scheduled mortgage
principal installments of $1,375,000 and distributions of $358,000 to minority
interest partners, resulting in a shortfall of $344,000. The deficit was due, in
part, to the increase in unpaid rent from Randall International, Inc., property
costs at the former Rheometric property and the absorption of costs at the
Sentry Technology property. In April 2003, CPA(R):12 renegotiated its
forbearance agreement with Randall, and, as a result, cash flow from the
Randall property has been reduced by $350,000. With the acquisition of the
interests in Starmark, Carrefour and Medica properties, annual cash flow from
operations and equity investments are projected to be sufficient to meet cash
flow objectives. In connection with the Rheometric lease termination, a payment
received of $2,250,000 was assigned to the mortgage lender. When evaluating cash
generated from operations, Management includes cash provided from equity
investments. Under accounting principles generally accepted in the United States
of America, distributions in excess of income from equity investments are a
return of capital and presented as an investing cash flow. The ability to
distribute cash from CPA(R):12's equity investees in excess of their income is
primarily due to noncash charges for depreciation. Therefore, Management
evaluates its ability to meet dividend objectives by combining such cash flows
with cash flow from operating activities. Cash flows from operations are
projected to increase after the funds are invested in real estate.
CPA(R):12 investing activities included using $21,021,000 to purchase equity
investments in the Starmark, Carrefour and Medica properties and $1,275,000 to
pay the Advisor its annual deferred acquisition fee installment. The fees are
paid on an annual basis each January. CPA(R):12 also received $3,738,000 from
its share of mortgage proceeds obtained by equity investees CPA(R):12 has no
current commitments for expansions or improvements to it existing properties. As
of May 12, 2003, CPA(R):12 has $9,639,000 available for additional investments.
In addition to using cash to pay dividends to shareholders, distributions to
minority partners and principal amortization, CPA(R):12's financing activities
included using $5,199,000 to pay off a mortgage loan on the Telos property. As a
result, annual cash flow will increase by $433,000. CPA(R):12 has no balloon
payments due until 2005. CPA(R):12 has a $20,000,000 credit facility available
to it for investment opportunities and potential liquidity needs. As of March
31, 2003, there were no amounts outstanding under the credit facility. 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.
14
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CPA(R):12's contractual obligations and commitments as of March 31,
2003 is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable (1) $188,360 $ 4,174 $ 5,948 $ 10,442 $ 11,537 $ 24,545 $131,714
Deferred acquisition fees 6,546 -- 1,338 1,406 1,209 814 1,779
Subordinated disposition fees 1,376 1,376
Commitments:
Share of minimum rents payable
under office cost-sharing
agreement 625 138 177 177 133 -- --
-------- -------- -------- -------- -------- -------- --------
$196,907 $ 4,312 $ 7,463 $ 12,025 $ 12,879 $ 25,359 $134,869
======== ======== ======== ======== ======== ======== ========
(1) The limited recourse mortgage notes payable were obtained in connection
with the acquisition of properties in the ordinary course of business.
ACCOUNTING PRONOUNCEMENTS:
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. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
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. CPA(R):12 adopted this statement effective January 1,
2003, and the adoption did not have a material affect on CPA(R):12's financial
statements. CPA(R):12 will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
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. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on CPA(R):12'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. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
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
15
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 adoption of the accounting
provisions of FIN 45 on January 1, 2003 did not have a material effect on
CPA(R):12's 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.
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. CPA(R):12's maximum loss exposure
is the carrying value of its equity investments. CPA(R):12 has evaluated the
impact of this interpretation on its accounting for its investments in
unconsolidated joint ventures and it does not expect to consolidate those
investments as none of these investments will be classified as VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively.
16
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risk to which CPA(R):12 is exposed is interest rate
risk and foreign currency exchange risk.
The value of CPA(R):12's real estate is subject to fluctuations based on changes
in interest and foreign currency exchange rates, local and regional economic
conditions and changes in the creditworthiness of lessees, and which may affect
CPA(R):12's ability to refinance its debt when balloon payments are scheduled.
CPA(R):12 owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuation based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of March 31,
2003 the interests in CCMT had a fair value approximately of $7,793,000.
CPA(R):12 also owns marketable equity securities of Proterion Corporation which
based on the quoted per share price of $0.38 as of March 31, 2003 had a fair
value of approximately $420,000.
All of CPA(R):12's $188,360,000 long-term debt bears interest at fixed rates,
and the fair value of these instruments is affected by changes in market
interest rates. The following table presents principal cash flows based upon
expected maturity dates of the debt obligations and the related weighted-average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate on the fixed rate debt as of March 31, 2003 ranged from 6.50% to 8.75%.
There has been no material change since December 31, 2002.
(in thousands)
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 4,174 $ 5,948 $ 10,442 $ 11,537 $ 24,545 $ 131,714 $188,360 $194,050
Average interest
rate 7.40% 7.40% 7.72% 7.75% 7.58% 7.47%
Since March 12, 2003, through an equity investment, CPA(R):12 has foreign
operations. Accordingly, CPA(R):12 is subject to foreign currency exchange risk
from the effects of exchange rate movements of foreign currencies and this may
affect future costs and cash flows; however, exchange rate movements to date
have not had a significant effect on CPA(R):12's financial position or results
of operations. CPA(R):12 has not entered into any foreign currency forward
exchange contracts to hedge the effects of adverse fluctuations in foreign
currency exchange.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
March 31, 2003.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
17
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2003, no matters were submitted to a
vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Co-Chief Executive Officers Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2003, CPA(R):12 was not required to
file any reports on Form 8-K.
18
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
5/13/2003 By: /s/ John J. Park
- ------------ ---------------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
5/13/2003 By: /s/ Claude Fernandez
- ------------ ---------------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
19
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 12 Incorporated (the "Registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and we have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and we have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 5/13/2003 Date 5/13/2003
--------------------------- ----------------------------
/s/ William Polk Carey /s/ Gordon F. DuGan
--------------------------- ----------------------------
William Polk Carey Gordon F. DuGan
Chairman Vice Chairman
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
20
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 12 Incorporated (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 5/13/2003
---------------------------
/s/ John J. Park
---------------------------
John J. Park
Chief Financial Officer
21