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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 11, 2003.
CPA(R):12 has 30,153,949 shares of common stock, $.001 par value
outstanding at August 11, 2003.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of June 30, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Income for the three and six
months ended June 30, 2003 and 2002 3
Condensed Consolidated Statements of Comprehensive Income for the three and
six months ended June 30, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
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 are
unaudited; however, in the opinion of management, all adjustments necessary
for a fair presentation of such financial statements have been included.
1
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Land and buildings, net of accumulated depreciation of $38,657,212 at
June 30, 2003 and $34,815,471 at December 31, 2002 $ 317,626,602 $ 315,608,791
Net investment in direct financing leases 19,127,500 24,987,051
Equity investments 91,297,981 70,551,264
Cash and cash equivalents 12,531,628 40,084,470
Marketable securities 8,748,799 7,510,030
Other assets 16,510,132 13,386,909
------------- -------------
Total assets $ 465,842,642 $ 472,128,515
============= =============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 186,998,057 $ 194,933,811
Accrued interest 1,047,623 1,098,917
Accounts payable and accrued expenses 2,611,067 2,170,744
Due to affiliates 2,849,311 2,843,060
Deferred acquisition fees payable to affiliate 6,546,125 6,255,973
Dividends payable 6,243,531 6,223,080
Prepaid rental income and security deposits 4,524,608 5,059,112
------------- -------------
Total liabilities 210,820,322 218,584,697
------------- -------------
Minority interest 7,973,963 7,937,305
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares; issued and
outstanding 31,060,017 shares at June 30, 2003 and 30,878,338
shares at December 31, 2002 31,060 30,878
Additional paid-in capital 280,615,622 278,735,372
Dividends in excess of accumulated earnings (26,697,883) (26,441,642)
Accumulated other comprehensive income 1,502,763 307,999
------------- -------------
255,451,562 252,632,607
Less, treasury stock at cost, 886,106 shares at June 30, 2003 and
747,252 shares at December 31, 2002 (8,403,205) (7,026,094)
------------- -------------
Total shareholders' equity 247,048,357 245,606,513
------------- -------------
Total liabilities, minority interest and shareholders'
equity $ 465,842,642 $ 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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Rental income $ 10,500,041 $ 10,059,283 $ 21,155,528 $ 20,104,028
Interest income from direct financing leases 646,458 1,353,467 1,292,916 2,669,590
Interest and other income 593,543 108,325 3,827,023 217,504
------------ ------------ ------------ ------------
11,740,042 11,521,075 26,275,467 22,991,122
------------ ------------ ------------ ------------
Expenses:
Interest 3,803,504 3,304,576 7,611,454 6,668,520
Depreciation 1,923,367 1,855,445 3,841,741 3,707,330
General and administrative 1,103,002 1,088,759 2,079,258 1,981,890
Property expenses 2,305,602 1,766,068 4,738,252 3,339,539
------------ ------------ ------------ ------------
9,135,475 8,014,848 18,270,705 15,697,279
------------ ------------ ------------ ------------
Income before minority interest, equity
investment and gain (loss) 2,604,567 3,506,227 8,004,762 7,293,843
Minority interest in income (378,026) (365,235) (756,718) (729,113)
Income from equity investments including charge on
early extinguishment of debt of $771,962 in 2002 2,594,006 1,654,839 5,065,811 2,508,997
------------ ------------ ------------ ------------
Income before gain (loss) 4,820,547 4,795,831 12,313,855 9,073,727
Unrealized loss on warrants (76,152) (413,103) (85,972) (494,146)
Reversal of unrealized gain on warrants on
conversion to shares -- -- (237,340) --
Gain on settlement of derivatives contract -- -- 237,340 --
------------ ------------ ------------ ------------
Net income $ 4,744,395 $ 4,382,728 $ 12,227,883 $ 8,579,581
============ ============ ============ ============
Basic and diluted income per common share $ .16 $ .15 $ .41 $ .28
============ ============ ============ ============
Weighted average shares outstanding - basic and
diluted 30,222,388 30,022,139 30,188,997 29,969,876
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 4,744,395 $ 4,382,728 $12,227,883 $ 8,579,581
Other comprehensive income:
Change in unrealized appreciation on marketable securities 567,388 -- 728,441 --
Change in foreign currency translation adjustment 620,471 -- 466,323 --
----------- ----------- ----------- -----------
1,187,859 -- 1,194,764 --
----------- ----------- ----------- -----------
Comprehensive income $ 5,932,254 $ 4,382,728 $13,422,647 $ 8,579,581
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 12,227,883 $ 8,579,581
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,126,617 3,820,516
Straight-line rent adjustments (783,064) (450,525)
Income from equity investments before charge on extinguishment of
debt in excess of distributions received (906,822) (313,155)
Charge on extinguishment of debt by equity investee -- 771,962
Fees paid by issuance of stock 1,505,512 1,424,837
Minority interest in income 756,718 729,113
Unrealized loss on warrants 85,972 494,146
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 (701,328) (1,612,006)
------------ ------------
Net cash provided by operating activities 13,723,488 13,444,469
------------ ------------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 612,831 628,563
Distributions of mortgage financing proceeds received from equity
investee 3,738,075 --
Purchases of real estate and equity investments and additional
capitalized costs (22,159,402) (1,062,268)
Payment of deferred acquisition fees (1,274,925) (1,375,711)
------------ ------------
Net cash used in investing activities (19,083,421) (1,809,416)
------------ ------------
Cash flows from financing activities:
Prepayments of mortgage principal (5,199,402) --
Payments on mortgage principal (2,736,352) (2,421,785)
Amounts advanced on credit facility -- 10,000,000
Repayments of advances on credit facility -- (10,000,000)
Distributions to minority interest partner (720,060) (719,400)
Payment of financing costs and mortgage deposits (71,231) (398,541)
Proceeds from issuance of shares, net of costs 374,920 805,347
Dividends paid (12,463,673) (12,319,501)
Purchase of treasury stock (1,377,111) (1,139,135)
------------ ------------
Net cash used in financing activities (22,192,909) (16,193,015)
------------ ------------
Net decrease in cash and cash equivalents (27,552,842) (4,557,962)
Cash and cash equivalents, beginning of period 40,084,470 27,147,331
------------ ------------
Cash and cash equivalents, end of period $ 12,531,628 $ 22,589,369
============ ============
Noncash investing activity:
In connection with a lease termination, a net investment in a direct
financing lease with a carrying value of $5,859,552 was reclassified as
land and buildings in 2003.
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:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and Carey Asset Management Corp (the "Advisor"), a
wholly-owned subsidiary of W. P. Carey & Co. LLC, 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 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 work necessary to the
operation of the Company. The Company incurred asset management fees of $862,422
and $711,675 for the three months ended June 30, 2003 and 2002, respectively,
and $1,655,286 and $1,422,925 for the six months ended June 30, 2003 and 2002,
respectively, with performance fees in like amounts. For the three months ended
June 30, 2003 and 2002, the Company incurred personnel cost reimbursements of
$347,598 and $343,065, respectively, and $704,810 and $654,628 for the six
months ended June 30, 2003 and 2002, respectively.
Fees are payable to the Advisor in connection with services performed relating
to the identification, evaluation, financing and purchase of properties. In
connection with services performed relating to the identification, evaluation,
negotiation, financing and purchase of properties, current and deferred fees for
the six months ended June 30, 2003 were $667,539 and $534,031, respectively.
On March 12, 2003, the Company purchased a 35% interest in thirteen properties
from Corporate Property Associates 15 Incorporated ("CPA(R):15"), an affiliate
(see Note 6). 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 June 30, 2003, the fair value of the Company's
interests was $8,195,587, reflecting an aggregate unrealized gain of $1,058,569
and cumulative net amortization of $101,604 ($65,014 for the six months ended
June 30, 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.
One of the key variables 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 market interest rates of 1% and 2% is as follows:
Fair Value as of June 30, 2003 1% Adverse Change 2% Adverse Change
------------------------------ ----------------- -----------------
Fair value of the interests $8,195,587 $7,783,674 $7,402,908
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
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 six-month periods ended June 30, 2003 and 2002 are as
follows:
2003 2002
------------ ------------
Per Statements of Income:
Rental income from operating leases $ 21,155,528 $ 20,104,028
Interest from direct financing leases 1,292,916 2,669,590
Adjustment:
Share of leasing revenue applicable to minority interest (1,548,695) (1,549,905)
Share of leasing revenue from equity investments 12,335,716 7,882,226
------------ ------------
$ 33,235,465 $ 29,105,939
============ ============
For the six-month periods ended June 30, 2003 and 2002, the Company earned its
net leasing revenues from its investments from the following lease obligors:
2003 % 2002 %
----------- ----------- ----------- -----------
Applied Materials, Inc. (a) $ 3,143,226 9% $ 3,145,692 11%
Advanced Micro Devices, Inc. (b) 1,629,469 5 1,629,469 6
Galyan's Trading Company 1,366,577 4 1,366,577 5
Carrefour France, SA (b) 1,204,210 4 -- --
Scott Companies Inc. 1,097,920 3 1,031,140 4
Perry Graphic Communications, Inc. and Judd's Incorporated 1,095,783 3 1,095,783 4
Starmark Camhood, L.L.C. (b) 1,085,615 3 -- --
TruServ Corporation (b) 1,083,342 3 -- --
Spectrian Corporation 1,075,500 3 1,015,089 3
Westell Technologies, Inc. 991,854 3 958,193 3
Special Devices, Inc. (b) 981,000 3 981,000 3
Best Buy Co., Inc. (b) 870,155 3 876,312 3
Career Education Corporation 868,404 3 868,404 3
Telos Corporation 832,770 3 802,199 3
Q Clubs, Inc. 773,226 2 767,910 3
PPD Development, Inc. 752,095 2 752,095 3
Del Monte Corporation (b) 738,857 2 643,125 2
Sicor, Inc. (b) 736,368 2 736,368 3
The Upper Deck Company (b) 726,110 2 726,110 2
Silgan Containers Corporation 710,677 2 637,500 2
Compucom Systems, Inc. (b) 704,022 2 678,178 2
McLane Company, Inc. (b) 703,147 2 695,416 2
The Bon-Ton Stores, Inc. 689,957 2 674,060 2
Childtime Childcare, Inc. 632,648 2 595,037 2
Textron, Inc. (b) 619,869 2 602,809 2
Jen-Coat, Inc. 605,000 2 605,000 2
ShopRite Supermarkets, Inc. (b) 545,341 2 540,787 2
Pacific Logistics, L.P. 509,668 2 465,375 2
Orbseal LLC 505,875 2 -- --
Other (b) 5,956,780 18 6,216,311 21
----------- ----------- ----------- -----------
$33,235,465 100% $29,105,939 100%
=========== =========== =========== ===========
(a) Net of minority interest of an affiliate.
(b) Represents the Company's proportionate share of lease revenues from its
equity investments.
For the six-month period ended June 30, 2003, lessees were responsible for the
direct payment of approximately $2,467,000 of real estate taxes on behalf of the
Company.
6
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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.
Summarized combined financial information of the Company's equity investees is
as follows:
(In thousands) June 30, 2003 December 31, 2002
------------- -----------------
Assets (primarily real estate) $889,243 $505,304
Liabilities (primarily mortgage notes payable) 577,708 284,254
Partners' and members' equity 311,535 221,050
Six months Ended June 30,
-------------------------
2003 2002
-------- --------
Revenues (primarily rental revenue) $ 43,039 $ 19,215
Expenses (primarily interest on mortgages and
depreciation) (25,780) (11,224)
Charge on early extinguishment of debt -- (2,086)
-------- --------
Net income $ 17,259 $ 5,905
======== ========
Note 6. Acquisitions of Real Estate:
Investments acquired during the six months ended June 30, 2003, all of which
were described in the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2003, are summarized as follows:
Original
Ownership Initial Mortgage Annual
Lease Obligor: Cost Interest Location Annual Rent Financing Debt Service Date Acquired
- -------------- ---- -------- -------- ----------- --------- ------------ -------------
Carrefour France, $37,438,205 35% 7 Locations $3,908,631 $32,313,050 $2,423,547 March 12, 2003
SA (a) in France
Medica - France, SA 14,114,745 35% 6 locations 1,479,263 13,041,210 991,502 March 12, 2003
(a) in France
Starmark Camhood 26,701,571 15% 15 health 2,740,860 16,245,000 1,514,047 February 7, 2003
L.L.C. (a) club
facilities
(a) Accounted for as an equity investment; amounts are shown pro rata to
reflect the Company's ownership interest.
Note 7. Gain on Settlement of Warrants:
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"). In
connection with the settlement, the Company recognized $2,722,227 of other
income in 2003.
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
7
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 and are measured at fair value with all
gains and losses in fair value reported as a component of other comprehensive
income as part of shareholders' equity. As of June 30, 2003, the quoted per
share price of Proterion was $0.50.
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.
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
8
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 and believes this interpretation will not have a material impact on
its accounting for its investments in unconsolidated joint ventures as none of
these investments are 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.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain financial instruments
that are mandatorily redeemable or include an obligation to repurchase. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company is currently evaluating whether this will have an impact
on the financial statements.
Note 9. Subsequent Event:
In July 2003, the Company and Sentry Technology Corporation ("Sentry") entered
into a termination agreement. Sentry agreed not to contest an eviction in
consideration for forgiveness of rent arrearages of $486,000 and penalties on
its leased property in Hauppauge, New York. Due to Sentry's inability to meet
lease obligations, the Company had previously paid $342,000 of real estate taxes
on the Hauppauge property in 2003. Under the agreement, Sentry will remain at
the property through September 30, 2003 and will pay monthly installments of
$16,000. Under the agreement, Sentry assigned the Company the right to collect
rent directly from Sentry's sub-tenants. In addition, Sentry has issued
1,000,000 shares of its common stock to the Company and a $250,000 promissory
note which is scheduled to be repaid over a three-year period. As of June 30,
2003, the quoted per share price of Sentry was $0.04. Annual lease revenues and
cash flows (rent less property-level debt service) from the Sentry lease were
approximately $581,000 and $290,000, respectively.
9
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Corporate Property
Associates 12, Incorporated's ("CPA(R):12") condensed consolidated financial
statements and notes thereto as of June 30, 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 rent, residual value and holding period. 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 value 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.
10
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 that 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
11
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 would be 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 for the three and six months ended June 30, 2003 increased by
$362,000 and $3,648,000, respectively, as compared with the three months and six
months ended June 30, 2002. The $3,648,000 increase for the comparable six month
periods included $2,722,000 earned from a lease termination settlement agreement
in the first quarter of 2003, $772,000 from CPA(R):12's share of a charge on
early extinguishment of debt (included in income from equity investments) in
2002, and changes in unrealized gains and losses on derivative instruments in
both 2003 and 2002. For both the three-month and six-months periods income
benefited from an increase in income from equity investments and interest income
from CPA(R):12's investment in the CPA(R) mortgage securitization. These
benefits were partially offset by increases in interest expense and property
expense.
The increase in income from equity investments was primarily due to the
acquisition of jointly-held investments with affiliates for properties leased to
TruServ Corporation, Starmark Camhood LLC, Medica-France, S.A. and affiliates of
Carrefour, S.A. which were acquired between December 2002 and March 2003. The
six-month period ended June 30, 2003 also included the $772,000 charge on
extinguishment. Of the $939,000 and $2,557,000 increases in equity income for
the comparable three-month and six-month periods, $788,000 and $1,305,000,
respectively, was due to the acquisitions. In addition, $174,000 and $344,000 of
the increase in income from equity investments for the three and six months
periods was due to the reclassification in August 2002 to an equity investment
as a result of a change in the ownership structure of properties leased to
ShopRite Supermarkets, Inc. Prior to the reclassification, the CPA(R):12's
results of operation reported the proportionate share of revenues and expenses.
The reclassification had no effect on the net income. In March 2003, Fleming
Companies, Inc. filed a voluntary petition for bankruptcy and subsequently,
terminated its lease in Grand Rapids, Michigan. CPA(R):12 owns a 40% interest in
the property. CPA(R):12's share of annual rent from the Fleming lease was
$617,000. If the Grand Rapids property remains vacant, CPA(R):12's share of
annual property carrying costs is estimated to be $160,000. The property is
currently being remarketed for lease.
12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Lease revenue (rental income and interest income from direct financing leases)
decreased by $266,000 and $325,000 for the three-month and six-month periods
ended June 30, 2003, respectively. The decrease partially reflects the
reclassification of ShopRite to the equity method. The decrease was also due to
the reduction of lease revenue of $242,000 and $288,000 for three-month and
six-month periods from partially vacant properties in Newark, Delaware and
Piscataway, New Jersey and a lease modification with Randall International, Inc.
The leases on the Newark property were short-term and as a result of the
occupancy rate declining to 2%, annual lease revenue will decrease by $703,000.
The decreases in lease revenues were offset by $503,000 rent increases during
the six-month period ended June 30, 2003 which represent an aggregate annual
increase of $1,006,000. Most of these rent increases are based on formulas
indexed to increases in the Consumer Price Index.
Interest expense increased by $499,000 and $943,000 for the three and six-month
periods ended June 30, 2003, respectively. The increase was primarily due to
$46,335,000 of limited recourse mortgage financing obtained in August 2002 in
connection with a mortgage securitization. The increase is partially offset by a
decrease in interest expense due to increasing mortgage amortization on existing
fixed rate mortgage loans and the payoff of a mortgage loan on the Telos
Corporation property in January 2003. Interest expense on the Telos loan was
$74,000 and $146,000 for the three-month and six-month periods ended June 30,
2002, respectively.
Property expense increased during both the three-month and six-month periods
ended June 30, 2003 primarily as a result of absorbing expenses on properties in
Piscataway, New Jersey formerly leased to Rheometric Scientific, Inc. and a
property in Hauppauge, New York leased to Sentry Technology Corporation. Annual
carrying costs on the Piscataway and Hauppauge properties are approximately
$586,000. In July 2003 CPA(R):12 entered into a termination agreement with
Sentry which will vacate the property in September 2003. In agreeing to
terminate the Rheometric lease, CPA(R):12 accepted a settlement of $2,722,000 in
cash and securities. CPA(R):12 is currently in negotiations to sell the
Hauppauge property. Property expenses increased also as a result of higher asset
management and performance fees, primarily as a result of the acquisition of
real estate interests over the past twelve months.
The increase in interest income was due to CPA(R):12's subordinated interest in
the mortgage securitization which was acquired in August 2002. Interest income
earned from this investment was $226,000 and $551,000 for the three-month and
six-month periods ended June 30, 2003, respectively.
FINANCIAL CONDITION:
There has been no material change in CPA(R):12's financial condition since
December 31, 2002. CPA(R):12's cash and cash equivalents at June 30, 2003 have
decreased $27,553,000 since December 31, 2002 primarily as a result of the
purchasing of a 35% ownership interest in a limited liability company which
leases properties to two lessees in France and which was acquired from an
affiliate, Corporate Property Associates 15 Incorporated, purchase of an equity
investment in single-tenant net leased properties and the satisfaction of a
balloon payment obligation on a mortgage loan.
Cash flows from operations and equity investments of $14,336,000 were $1,584,000
less than the aggregate of dividends of $12,464,000, scheduled mortgage
principal installments of $2,736,000 and distributions of $720,000 to minority
partners. This was due, in part, to the increase in the deferral of rent from
Randall's lease modification agreement and absorbing property expenses for the
Hauppauge and Piscataway properties. Since June 30, 2003, CPA(R):12 terminated
Sentry's lease due to its inability to meet its lease obligations. With the
acquisition of interests in Starmark, Carrefour and Medica properties, annual
cash flow is projected to increase by approximately $3,300,000, and which
management projects will allow CPA(R):12 to meet cash flow objectives. As of
June 30, 2003, CPA(R):12 has not yet received cash distributions from the
Carrefour and Medica equity investments, however, the affiliate owning the
investments has received the rents. Annual distributions from Carrefour and
Medica are expected to be $2,070,000.
CPA(R):12's investing activities included using $22,159,000 to acquire equity
investments in the Starmark, Carrefour and Medica properties and $1,275,000 to
pay the Advisor its annual installment of deferred acquisition fees. 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 its existing properties.
13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In addition to using cash to pay dividends to shareholders, distributions to
minority partners and mortgage principal installments, CPA(R):12's financing
activities included using $5,199,000 to pay off a mortgage loan collateralized
by a property leased to Telos Corporation in January 2003 and $1,377,000 to
purchase treasury stock. Solely as a result of paying off the Telos loan, annual
cash flow from the Telos property will increase by $433,000. CPA(R):12 has no
balloon payments scheduled on its mortgages until 2005. CPA(R):12 has a
$20,000,000 credit facility available to it for investment opportunities and
potential liquidity needs. As of June 30, 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. CPA(R):12 is
evaluating whether it will renew the credit facility.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CPA(R):12's contractual obligations and commitments as of June 30,
2003 is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
-------- -------- -------- -------- -------- -------- --------
Obligations:
Limited recourse mortgage notes
payable (1) $186,998 $ 2,813 $ 5,948 $ 10,442 $ 11,537 $ 24,545 $131,713
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 565 78 177 177 133 -- --
-------- -------- -------- -------- -------- -------- --------
$195,485 $ 2,891 $ 7,463 $ 12,025 $ 12,879 $ 25,359 $134,868
======== ======== ======== ======== ======== ======== ========
(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.
14
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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
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 and
believes this interpretation will not have a material impact on its accounting
for its investments in unconsolidated joint ventures as none of these
investments are 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.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain
15
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
financial instruments that are mandatorily redeemable or include an obligation
to repurchase. Such financial instruments will be measured at fair value with
changes in fair value included in the determination of net income. SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. CPA(R):12 is currently evaluating whether this
will have an impact on the financial statements.
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
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 June 30,
2003 the interests in CCMT had a fair value approximately of $8,196,000.
CPA(R):12 also owns marketable equity securities of Proterion Corporation which
based on the quoted per share price of $0.50 as of June 30, 2003 had a fair
value of approximately $553,000.
All of CPA(R):12's $186,998,000 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 June 30, 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 $2,813 $5,948 $10,442 $11,537 $24,545 $131,713 $186,998 $194,683
Average interest
rate 7.40% 7.40% 7.72% 7.75% 7.58% 7.47%
On March 12, 2003, through an equity investment, CPA(R):12 acquired an interest
in 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. In addition, the underlying properties are
financed with fixed-rate mortgage debt so that changes in exchange rates that
would increase or decrease rental revenues from the properties would be
partially offset by exchange rate changes on debt service. 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
June 30, 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 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.
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART II
Item 5. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders' meeting was held on June 10, 2003, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a one-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No Shares Abstaining
---------------- ------------------- ----------------- ---------------- -----------------
William P. Carey 15,869,223 15,657,654 29,515 182,054
Francis X. Diebold 15,869,223 15,681,089 6,080 182,054
Elizabeth P. Munson 15,869,223 15,670,856 16,313 182,054
William Ruder 15,869,223 15,629,342 57,827 182,054
George E. Stoddard 15,869,223 15,600,497 86,672 182,054
Ralph F. Verni 15,869,223 15,675,969 11,200 182,054
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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 June 30, 2003, CPA(R):12 was not required to
file any reports on Form 8-K.
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
8/11/2003 By: /s/ John J. Park
- ------------ -----------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
8/11/2003 By: /s/ Claude Fernandez
- ------------ -----------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
19