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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |.
Registrant has no active market for its common stock as of March 5, 2004.
Non-affiliates held 28,656,471 shares as of March 5, 2004.
As of March 5, 2004, there are 30,306,943 shares of common stock of Registrant
outstanding.
CPA(R):12 incorporates by reference its definitive Proxy Statement with
respect to its 2004 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART I
Item 1. Business.
Corporate Property Associates 12 ("CPA(R):12") Incorporated is a real estate
investment trust ("REIT") that acquires and owns commercial properties leased to
companies nationwide and internationally, primarily on a triple net basis. As of
December 31, 2003, CPA(R):12's portfolio consisted of 120 properties leased to
62 tenants and totaling more than 9.4 million square feet.
CPA(R):12's core investment strategy is to own and manage its portfolio of
properties leased to a variety of companies on a single tenant net lease basis,
to maximize shareholder returns. Additional properties may be bought and net
leased if appropriate opportunities arise. These leases generally place the
economic burden of ownership on the tenant by requiring them to pay the costs of
maintenance, insurance, taxes, structural repairs and other operating expenses.
CPA(R):12 also generally includes in its leases:
- clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index or
other indices for the jurisdiction in which the property is
located or, when appropriate, increases tied to the volume of
sales at the property;
- covenants restricting the activity of the tenant to reduce the
risk of a change in credit quality;
- indemnification of CPA(R):12 for environmental and other
liabilities; and
- guarantees from parent companies or other entities.
CPA(R):12 was formed as a Maryland corporation on July 30, 1993. Between
February 1994 and September 1997, CPA(R):12 sold a total of 28,334,451 shares of
common stock for a total of $283,344,510 in offering proceeds. CPA(R):12 also
raised an additional $10,000,000 through a private placement of its common stock
in January 2001. These proceeds have been combined with limited recourse
mortgage debt to purchase CPA(R):12's property portfolio. As a REIT, CPA(R):12
is not subject to federal income taxation as long as it satisfies certain
requirements relating to the nature of its income, the level of its
distributions and other factors.
W. P. Carey & Co. LLC ("WPC"), CPA(R):12's advisor, provides both strategic and
day-to-day management for CPA(R):12, including acquisition services, research,
investment analysis, asset management, capital funding services, disposition of
assets, investor relations and administrative services. WPC also provides office
space and other facilities for CPA(R):12. WPC has dedicated senior executives in
each area of its organization so that CPA(R):12 functions as a fully integrated
operating company. CPA(R):12 pays asset management fees to WPC and pays certain
transactional fees. CPA(R):12 also reimburses WPC for certain expenses. WPC also
serves in this capacity for Carey Institutional Properties Incorporated
("CIP(R)"), Corporate Property Associates 14 Incorporated ("CPA(R):14"),
Corporate Property Associates 15 Incorporated ("CPA(R):15") and Corporate
Property Associates 16 - Global Incorporated ("CPA(R):16-Global"). WPC is a
publicly-traded company on the New York Stock Exchange and Pacific Exchange
under the symbol "WPC."
CPA(R):12's principal executive offices are located at 50 Rockefeller Plaza, New
York, NY 10020 and its telephone number is (212) 492-1100. As of December 31,
2003, CPA(R):12 had no employees. WPC employs 120 individuals.
BUSINESS OBJECTIVES AND STRATEGY
CPA(R):12's objectives are to:
- pay quarterly dividends at an increasing rate that for taxable
shareholders are partially free from current taxation;
- provide inflation protected income;
- purchase and own a diversified portfolio of net-leased real
estate that will increase in value; and
- increase the value of its shares by increasing the equity in
its real estate by making regular mortgage principal payments.
CPA(R):12 seeks to achieve these objectives by purchasing and holding industrial
and commercial properties each net leased to a single corporate tenant.
CPA(R):12 intends its portfolio to be diversified by geography, property type
and by tenant.
-1-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SIGNIFICANT DEVELOPMENTS DURING 2003
On January 16, 2003, Rheometric Scientific, Inc. ("Rheometric") completed the
asset sale of one its lines of business, at which time the lease termination
agreement between Rheometric and CPA(R):12 for the facility in Piscataway, New
Jersey became effective and Rheometric changed its name to Proterion Corporation
("Proterion"). In connection with the settlement, CPA(R):12 recognized
$3,042,227 of other income in 2003. The settlement included a grant of 650,000
shares of common stock. In connection with structuring the initial purchase
transaction with Rheometric, CPA(R):12 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.
On February 7, 2003, CPA(R):12 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 Camhood LLC. The
lease obligations of Starmark are jointly and 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.
On March 12, 2003, CPA(R):12 purchased a 35% interest in a limited liability
company from CPA(R):15 which retained the remaining 65% interest. The limited
liability company owns properties in France that are leased to Medica-France and
Carrefour France, S.A. The purchase price for the 35% interest was $11,916,465
in cash and the assumption of a deferred fee payable to WPC 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 WPC, 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 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 the 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.
On November 27, 2003, the limited liability company purchased an additional
Carrefour property in Nimes, France for (euro)17,277,481 ($20,634,503 as of the
date of acquisition) and obtained additional limited recourse mortgage financing
of (euro)14,025,000 ($16,750,058) which was added to the existing mortgage
balance on the Carrefour properties. The lease for the Nimes property provides
for annual rent of (euro)1,608,750 ($1,921,330) and has a term through November
2012 with annual rent increases based on the INSEE.
In connection with the purchase of the Nimes property, WPC, the parent company
of the Advisor, purchased a 22.5% interest in the Carrefour properties at which
time the Company's interest in the Carrefour properties was reduced to 27.125%.
WPC's purchase price was based on an independent appraisal of the properties.
In October 2003, CPA(R):12 funded approximately $700,000 improvements to its
existing property leased to Wal-Mart Stores, Inc. in exchange for an increase in
annual rent of $110,000 and Wal-Mart's commitment to a five-year extension term.
In November 2003, Scott Companies, Inc. entered into liquidation proceedings and
subsequently terminated its lease at a property in San Leandro, California. The
Scott lease had provided lease revenues of $2,223,000. The property is being
remarketed.
-2-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
ACQUISITION STRATEGIES
WPC has a well-developed process with established procedures and systems for
acquiring net leased property on behalf of CPA(R):12. As a result of its
reputation and experience in the industry and the contacts maintained by its
professionals, WPC has a presence in the net lease market that has provided it
with the opportunity to invest in a significant number of transactions on an
ongoing basis. CPA(R):12 takes advantage of WPC's presence in the net lease
market to build its portfolio. In evaluating opportunities for CPA(R):12, WPC
carefully examines the credit, management and other attributes of the tenant and
the importance of the property under consideration to the tenant's operations.
Careful credit analysis is a crucial aspect of every transaction. CPA(R):12
believes that WPC has one of the most extensive underwriting processes in the
industry and has an experienced staff of professionals involved with
underwriting transactions. WPC seeks to identify those prospective tenants whose
creditworthiness is likely to improve over time. CPA(R):12 believes that the
experience of WPC's management in structuring sale-leaseback transactions to
meet the needs of a prospective tenant enables WPC to obtain a higher return for
a given level of risk than would typically be available by purchasing a property
subject to an existing lease.
WPC's strategy in structuring its net lease investments for CPA(R):12 is to:
- combine the stability and security of long-term lease
payments, including rent increases, with the appreciation
potential inherent in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type
of facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements
from the tenant when possible, such as warrants to purchase
tenant common stock. As of December 31, 2003, CPA(R):12 held
warrant positions in four tenants.
FINANCING STRATEGIES
Consistent with its investment policies, CPA(R):12 uses leverage when available
on favorable terms. CPA(R):12 has approximately $184,206,000 in property level
debt outstanding. These mortgages mature between the current year and 2021 and
have interest rates between 6.5% and 8.75%. CPA(R):12's credit facility matured
in October 2003.
CPA(R):12 is a party to a mortgage financing securitization transaction with
three affiliates, WPC, CIP(R) and CPA(R):14 entered into in August 2002.
CPA(R):12 and the three affiliates obtained an aggregate of approximately
$172,335,000 of limited recourse mortgage financing collateralized by 62 leased
properties. The lender pooled the loans into a trust, Carey Commercial Mortgage
Trust, a non-affiliate, whose assets consist solely of the loans, and sold the
interests in the trust as collateralized mortgage obligations in a private
placement to institutional investors. CPA(R):12 and the three affiliates agreed
to acquire a separate class of subordinated interests in the trust (the "CPA(R)
Interests"). The amount of CPA(R) Interests acquired by CPA(R):12 was
proportional to the mortgage amounts obtained. The CPA(R) Interests were
purchased for $24,128,739 of which CPA(R):12's share was $7,238,622, or 30%, and
are comprised of two components, a component that will receive payments of
principal and interest and a component that will receive payments of interest
only. CPA(R):12 is accounting for its interest in the CPA(R) Interests as an
available-for-sale security and will be measured at fair value with all gains
and losses from changes in fair value reported as a component of other
comprehensive income as part of shareholders' equity.
WPC continually seeks opportunities and considers alternative financing
techniques to finance properties not currently subject to debt, refinance debt,
reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, WPC reviews and structures many aspects of
a transaction, including the tenant, the real estate and the lease, to determine
whether a potential acquisition can be structured to satisfy CPA(R):12's
acquisition criteria. The aspects of a transaction which are reviewed and
structured by WPC include the following:
Tenant Evaluation. WPC subjects each potential tenant to an extensive
evaluation of its credit, management, position within its industry,
operating history and profitability. WPC seeks tenants it believes will
have stable or improving credit. By leasing properties to these types of
tenants, CPA(R):12 can generally charge rent that is higher than the rent
charged to tenants with recognized credit and, thereby, enhance its
current return from these properties as compared with properties leased to
companies whose credit potential has
-3-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
already been recognized by the market. Furthermore, if a tenant's credit
does improve, the value of CPA(R):12's properties leased to that tenant
will likely increase (if all other factors affecting value remain
unchanged). WPC may also seek to enhance the likelihood of a tenant's
lease obligations being satisfied, such as through a letter of credit or a
guaranty of lease obligations from the tenant's corporate parent. This
credit enhancement provides CPA(R):12 with additional financial security.
Leases with Increasing Rents. WPC seeks to include clauses in CPA(R):12's
leases that provide for increases in rent over the term of the leases.
These increases are generally tied to increases in certain indices such as
the consumer price index, in the case of retail stores, participation in
gross sales above a stated level, mandated rental increases on specific
dates and through other methods. CPA(R):12 seeks to avoid entering into
leases that provide for contractual reductions in rents during their
primary term (other than reductions related to reductions in debt
service).
Properties Important to Tenant Operations. WPC, on behalf of CPA(R):12,
generally seeks to acquire properties with operations that are essential
or important to the ongoing operations of the tenant. CPA(R):12 believes
that these properties provide better protection in the event that tenants
file for bankruptcy, because leases on properties essential or important
to the operations of a bankrupt tenant are less likely to be rejected and
terminated by a bankrupt tenant. WPC also seeks to assess the income, cash
flow and profitability of the business conducted at the property, so that,
if the tenant is unable to operate its business, CPA(R):12 can either
continue operating the business conducted at the property or re-lease the
property to another entity in the industry which can operate the property
profitably.
Lease Provisions that Enhance and Protect Value. When appropriate, WPC
attempts to include provisions in CPA(R):12's leases that require
CPA(R):12's consent to certain tenant activity or require the tenant to
satisfy certain operating tests. These provisions include, for example,
operational and financial covenants of the tenant, prohibitions on a
change in control of the tenant and indemnification from the tenant
against environmental and other contingent liabilities. Including these
provisions in its leases enables CPA(R):12 to protect its investment from
changes in the operating and financial characteristics of a tenant that
may impact its ability to satisfy its obligations to CPA(R):12 or could
reduce the value of CPA(R):12's properties.
Diversification. WPC tries to diversify CPA(R):12's portfolio of
properties to avoid dependence on any one particular tenant, type of
facility, geographic location and tenant industry. By diversifying its
portfolio, CPA(R):12 reduces the adverse effect on CPA(R):12 of a single
under-performing investment or a downturn in any particular industry or
geographic location.
WPC employs a variety of other strategies and practices in connection with
CPA(R):12's acquisitions. These strategies include attempting to obtain equity
enhancements in connection with transactions. Typically, these equity
enhancements involve warrants to purchase stock of the tenant to which the
property is leased or the stock of the parent of the tenant. In certain
instances, CPA(R):12 grants to the tenant a right to purchase the property
leased by the tenant, but generally the option purchase price will not be less
than the fair market value of the property. WPC's practices include performing
evaluations of the physical condition of properties and performing environmental
surveys in an attempt to determine potential environmental liabilities
associated with a property prior to its acquisition.
As a transaction is structured, it is evaluated by the Chairman of the
Investment Committee with respect to the potential tenant's credit, business
prospects, position within its industry and other characteristics important to
the long-term value of the property and the capability of the tenant to meet its
lease obligations. Before a property is acquired, the transaction is reviewed by
the Investment Committee to ensure that it satisfies CPA(R):12's investment
criteria. Aspects of the transaction that are typically reviewed by the
Investment Committee include the expected financial returns, the
creditworthiness of the tenant, the real estate characteristics and the lease
terms.
The Investment Committee is not directly involved in originating or negotiating
potential acquisitions, but instead functions as a separate and final step in
the acquisition process. WPC places special emphasis on having experienced
individuals serve on its Investment Committee and does not invest in a
transaction unless it is approved by the Investment Committee.
CPA(R):12 believes that the Investment Committee review process gives it a
unique, competitive advantage over other unaffiliated net lease companies
because of the substantial experience and perspective that the Investment
Committee has in evaluating the blend of corporate credit, real estate and lease
terms that combine to make an acceptable risk.
-4-
The following people serve on the Investment Committee:
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the
CPA(R) Programs for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice
Chairman, Director and Chief Investment Officer of The
Prudential Insurance Company of America. As Chief Investment
Officer, Mr. Hoenemeyer was responsible for all of
Prudential's investments, including stocks, bonds, private
placements, real estate and mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice
President - Head of Bond & Corporate Finance Department of the
John Hancock Mutual Life Insurance Company. His
responsibilities included overseeing $21 billion of Fixed
income investments for Hancock, its affiliates and outside
clients.
- Lawrence R. Klein is Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton
School. Dr. Klein has been awarded the Alfred Nobel Memorial
Prize in Economic Sciences and currently advises various
governments and government agencies.
- Ralph F. Verni, is a private investor and business consultant
and formerly Chief Investment Officer of The New England
Mutual Life Insurance Company.
- Karsten von Koller was formerly Chairman and Member of the
Board of Managing Directors of Eurohypo AG, the leading
commercial real estate financing company in Europe.
ASSET MANAGEMENT
CPA(R):12 believes that effective management of its net lease assets is
essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
WPC monitors, on an ongoing basis, compliance by tenants with their lease
obligations and other factors that could affect the financial performance of any
of its properties. Monitoring involves receiving assurances that each tenant has
paid real estate taxes, assessments and other expenses relating to the
properties it occupies and confirming that appropriate insurance coverage is
being maintained by the tenant. WPC reviews financial statements of its tenants
and undertakes regular physical inspections of the condition and maintenance of
its properties. Additionally, WPC periodically analyzes each tenant's financial
condition, the industry in which each tenant operates and each tenant's relative
strength in its industry.
HOLDING PERIOD
CPA(R):12 intends to hold each property it acquires for an extended period. The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors with a view to
achieving maximum capital appreciation and after-tax return for the CPA(R):12
shareholders. If CPA(R):12's common stock is not listed for trading on a
national securities exchange or included for quotation on NASDAQ, CPA(R):12's
policy is to generally begin selling properties within ten years after the
proceeds of the public offering are substantially invested, subject to market
conditions. Pursuant to this policy, CPA(R):12's board of directors will begin
considering liquidity alternatives for CPA(R):12 over the course of the next
year or two. The board of directors will make the decision whether to list the
shares, liquidate or devise an alternative liquidity strategy which is likely to
result in the greatest value for the shareholders.
COMPETITION
CPA(R):12 faces competition for the acquisition of office and industrial
properties in general, and such properties net leased to major corporations in
particular, from insurance companies, credit companies, pension funds, private
individuals, investment companies and other REITs. CPA(R):12 also faces
competition from institutions that provide or arrange for other types of
commercial financing through private or public offerings of equity or debt or
traditional
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
bank financings. CPA(R):12 believes its management's experience in real estate,
credit underwriting and transaction structuring will allow CPA(R):12 to compete
effectively for office and industrial properties.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. CPA(R):12's leases often
provide that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.
CPA(R):12 typically undertakes an investigation of potential environmental risks
when evaluating an acquisition. Phase I environmental assessments are performed
by independent environmental consulting and engineering firms for all properties
acquired by CPA(R):12. Where warranted, Phase II environmental assessments are
performed. Phase I assessments do not involve subsurface testing, whereas Phase
II assessments involve some degree of soil and/or groundwater testing. CPA(R):12
may acquire a property which is known to have had a release of hazardous
materials in the past, subject to a determination of the level of risk and
potential cost of remediation. CPA(R):12 normally requires property sellers to
indemnify it fully against any environmental problem existing as of the date of
purchase. Additionally, CPA(R):12 often structures its leases to require the
tenant to assume most or all responsibility for compliance with the
environmental provisions of the lease or environmental remediation relating to
the tenant's operations and to provide that non-compliance with environmental
laws is a lease default. In some cases, CPA(R):12 may also require a cash
reserve, a letter of credit or a guarantee from the tenant, the tenant's parent
company or a third party to assure lease compliance and funding of remediation.
The value of any of these protections depends on the amount of the collateral
and/or financial strength of the entity providing the protection. Such a
contractual arrangement does not eliminate CPA(R):12's statutory liability or
preclude claims against CPA(R):12 by governmental authorities or persons who are
not a party to the arrangement. Contractual arrangements in CPA(R):12's leases
may provide a basis for CPA(R):12 to recover from the tenant damages or costs
for which it has been found liable.
INDUSTRY SEGMENT
CPA(R):12 operates in one industry segment, investment in net leased real
property. For the year ended December 31, 2003, Applied Materials, Inc.
represented 10% of the total operating revenue of CPA(R):12. Applied Materials
is publicly traded and files financial information with the United States
Securities and Exchange Commission in accordance with the 1993 and 1994 Acts.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") became effective in December 1995. The Act provides a "safe harbor" for
companies that make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
CPA(R):12 wishes to take advantage of the "safe harbor" provisions of the Act
and is therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
CPA(R):12's future results may be affected by certain risks and uncertainties
including the following:
We are subject to the risks of real estate ownership which could reduce the
value of our properties. Our properties may include net leased industrial and
commercial property. The performance of CPA(R):12 is subject to risks incident
to the ownership and operation of these types of properties, including:
-6-
- changes in the general economic climate;
- changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
- changes in interest rates and the availability of financing;
- competition from other available space; and
- changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
We may have difficulty selling or re-leasing our properties.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. Many of the
net leases we enter into or acquire are for properties that are specially suited
to the particular needs of our tenant. With these properties, if the current
lease is terminated or not renewed, we may be required to renovate the property
or to make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, we may have
difficulty selling it to a party other than the tenant due to the special
purpose for which the property may have been designed. In addition, provisions
of the Internal Revenue Code relating to REITs limit our ability to sell
properties held for fewer than four years. These and other limitations may
affect our ability to sell properties without adversely affecting returns to our
shareholders.
The inability of a tenant in a single tenant property to pay rent will reduce
our revenues.
Most of our properties are occupied by a single tenant and, therefore, the
success of our investments is materially dependent on the financial stability of
our tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and cause us
to have to find an alternative source of revenue to meet the mortgage payment
and prevent a foreclosure if the property is subject to a mortgage. In the event
of a default, we may experience delays in enforcing our rights as landlord and
may incur substantial costs in protecting our investment and reletting our
property. If a lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell the property
without incurring a loss.
The bankruptcy of tenants would cause a reduction in revenue.
A tenant in bankruptcy could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms providing for the repurchase of a property by the
tenant, a bankruptcy court could recharacterize a net lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor.
Some of the programs managed by WPC or its affiliates have had tenants file for
bankruptcy protection and are involved in litigation. Four CPA(R) programs had
to reduce the rate of distributions to their partners as a result of adverse
developments involving tenants.
If our tenants are highly leveraged, they may have a higher possibility of
filing for bankruptcy. Of tenants that experience downturns in their operating
results due to adverse changes to their business or economic conditions, those
that are highly leveraged may have a higher possibility of filing for
bankruptcy. In bankruptcy, a tenant has the option of vacating a property
instead of paying rent. Until such a property is released from bankruptcy, our
revenues would be reduced and could cause us to reduce distributions to
shareholders. We have highly leveraged tenants at this time, and we may have
additional highly leveraged tenants in the future.
Our tenants generally do not have a recognized credit rating, which may create a
higher risk of lease defaults and therefore lower revenues than if our tenants
had a recognized credit rating.
-7-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose a higher risk of default than would long term leases with tenants
whose credit potential has already been recognized by the market.
There is not, and may never be a public market for our shares, so it will be
difficult for shareholders to sell shares quickly.
There is no current public market for the shares and, therefore, it will be
difficult for shareholders to sell their shares promptly. In addition, the price
received for any shares sold is likely to be less than the proportionate value
of the real estate we own.
Our success is dependent on the performance of WPC.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of WPC in the acquisition of investments, the
selection of tenants, the determination of any financing arrangements, and upon
the management of the assets. You will have no opportunity to evaluate the terms
of transactions or other economic or financial data concerning our investments.
You must rely entirely on the management ability of WPC and the oversight of the
board of directors.
WPC may be subject to conflicts of interest.
WPC manages our business and selects our real estate investments. WPC has some
conflicts of interest in its management of CPA(R):12, which arise primarily from
the involvement of WPC and its affiliates in other activities that may conflict
with CPA(R):12 and the payment of fees by us to WPC and its affiliates. The
activities in which a conflict could arise between CPA(R):12 and WPC are:
- the receipt of commissions, fees and other compensation by WPC
and its affiliates for property purchases, leases, sales and
financing for CPA(R):12, which may cause WPC and its
affiliates to engage in transactions that generate higher
fees, rather than transactions that are more appropriate or
beneficial for our business;
- agreements between CPA(R):12 and WPC or any of its affiliates,
including agreements regarding compensation of WPC and its
affiliates, will not be negotiated on an arm's length basis as
would occur if the agreements were with unaffiliated third
parties;
- purchases and loans from affiliates, subject to CPA(R):12's
investment procedures, objectives and policies, which will
increase fees and interest payable to affiliates, thereby
decreasing our net income and possibly causing us to incur
higher leverage levels;
- competition with certain affiliates for property acquisitions,
which may cause WPC and its affiliates to direct properties
suitable for us to other related entities;
- disposition, incentive and termination fees, which are based
on the sale price of properties, may cause a conflict between
the advisor's desire to sell a property and our plans to hold
or sell the property.
Inherent in these transactions is the conflict of interest that arises due to
the potential impact of the transaction on the amount of fees received by WPC
and/or its affiliates and the distributions to shareholders.
Liability for uninsured losses could adversely affect our financial condition.
Losses from disaster-type occurrences (such as wars or earthquakes) may be
either uninsurable or not insurable on economically viable terms. Should an
uninsured loss occur, we could lose our capital investment and/or anticipated
profits and cash flow from one or more properties.
Potential liability for environmental matters could adversely affect our
financial condition.. We own industrial and commercial properties and are
subject to the risk of liabilities under federal, state and local environmental
laws. Some of these laws could impose the following on CPA(R):12:
- Responsibility and liability for the cost of removal or
remediation of hazardous substances released on our property,
generally without regard to our knowledge or responsibility of
the presence of the contaminants.
- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for
the disposal or treatment of these substances.
- Potential liability for common law claims by third parties
based on damages and costs of environmental contaminants.
-8-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Our costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to borrow using
the property as collateral.
Our use of debt to finance acquisitions could adversely affect our cash flow.
Most of our property acquisitions have been made by borrowing a portion of the
purchase price of our properties and securing the loan with a mortgage on the
property. If we are unable to make our debt payments as required, a lender could
foreclose on the property or properties securing its debt. This could cause us
to lose part or all of our investment which in turn could cause the value of the
shares and distributions to shareholders to be reduced. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity
invested in the property. We typically borrow between 55% and 65% of the
purchase price of our properties. There is no limitation on the amount borrowed
on a single property and the aggregate borrowings may not exceed 75% of the
value of all properties. Any borrowings in excess of 75% of the value of all
properties must be approved by a majority of the independent directors and
disclosed to shareholders. As of December 31, 2003, we had limited recourse
mortgage notes payable outstanding of $184,206,000.
Failure to qualify as a REIT could adversely affect our operations and ability
to make distributions.
If we fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to shareholders
because of the additional tax liability. In addition, distributions to
shareholders would no longer qualify for the distributions paid deduction and we
would no longer be required to make distributions. We might be required to
borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and
various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize
our REIT status.
The Internal Revenue Service may take the position that specific sale-leaseback
transactions we will treat as true leases are not true leases for federal income
tax purposes but are, instead, financing arrangements or loans. If a
sale-leaseback transaction were so recharacterized, we might fail to satisfy the
Asset Tests or the Income Tests and consequently lose our REIT status effective
with the year of recharacterization. Alternatively, the amount of our REIT
Taxable Income could be recalculated which could cause us to fail the
Distribution Test.
Balloon payment obligations may adversely affect our financial condition.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets.
Scheduled balloon payments for the next five years are as follows:
- 2004 - None;
- 2005 - $4.1 million;
- 2006 - $5.2 million;
- 2007 - $18.5 million; and
- 2008 - $16.9 million
A limit on the number of shares a person may own may discourage a takeover.
Our articles of incorporation restrict ownership of more than 9.8% of the
outstanding shares by one person. These restrictions may discourage a change of
control of CPA(R):12 and may deter individuals or entities from making tender
offers for shares, which offers might be financially attractive to shareholders
or which may cause a change in the management of CPA(R):12.
Maryland law could restrict change in control.
-9-
Provisions of Maryland law applicable to us prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting
power of outstanding shares;
- an affiliate of us who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10%
or more of the voting power of our outstanding shares ("an
interested shareholder"); or
- an affiliate of an interested shareholder.
These prohibitions last for five years after the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in shareholders' interest. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of directors prior to the time that
someone becomes an interested shareholder.
Our participation in joint ventures creates additional risk. We participate in
joint ventures with other entities, some of which may be unaffiliated with us.
There are additional risks involved in these types of transactions. These risks
include the potential of our joint venture partner becoming bankrupt and the
possibility of diverging or inconsistent economic or business interests of us
and our partner. These diverging interests could result in, among other things,
exposing us to liabilities of the joint venture in excess of our proportionate
share of these liabilities. The partition rights of each owner in a jointly
owned property could reduce the value of each portion of the divided property.
In addition, the fiduciary obligation that WPC may owe to our partner in an
affiliated transaction may make it more difficult for us to enforce our rights.
In some of our joint venture relationships with publicly registered investment
programs or other entities sponsored by WPC or one of its affiliates, we enter
into investments as tenants-in-common. This poses risks in addition to those
mentioned above. The partition rights of each co-tenant in a tenancy-in-common
could reduce the value of each portion of the divided property. In addition, the
fiduciary obligation that WPC may owe to our partner in an affiliated
transaction may make it more difficult for us to enforce our rights.
International investments involve additional risks.
We own an interest in properties in France and we may purchase additional
property located outside the United States. These investments may be affected by
factors peculiar to the laws of the jurisdiction in which the property is
located. These laws may expose us to risks that are different from and in
addition to those commonly found in the United States. Foreign investments could
be subject to the following risks:
- changing governmental rules and policies;
- enactment of laws relating to the foreign ownership of
property and laws relating to the ability of foreign persons
or corporations to remove profits earned from activities
within the country to the person's or corporation's country of
origin;
- variations in the currency exchange rates;
- adverse market conditions caused by changes in national or
local economic conditions;
- changes in relative interest rates;
- change in the availability, cost and terms of mortgage funds
resulting from varying national economic policies;
- changes in real estate and other tax rates and other operating
expenses in particular countries;
- changes in land use and zoning laws; and
- more stringent environmental laws or changes in such laws.
We may incur costs to finish build-to-suit properties.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Oftentimes,
completion risk, cost overruns and on-time delivery are the obligations of the
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process we may be required to incur project costs to complete all or part of the
project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio returns.
-10-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. Properties.
Set forth below is certain information relating to the Company's properties
owned as of December 31, 2003.
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------ ------------------- ---------- ---------- ----------- --------- --------- ---------
SOCIETE LOGIDIS AND SOCIETE CV LOGISTIQUE (CARREFOUR FRANCE, S.A. AND CARREFOUR HYPERMARCHES FRANCE, S.A.)(3)
Cholet, Ploufragan,
Colomiers, Crepy en Vallois,
Lens, Nimes, and Thuit
Hebert, France 27.125% 2,940,004 $5.04 $4,018,847(8) INSEE(9) Dec. 2011 None
ADVANCED MICRO DEVICES, INC.(3)
33 1/3% interest in
a limited liability
Sunnyvale, CA company owning land
and buildings 361,965 $27.01 $3,258,938 CPI Aug. 2019 Aug. 2039
STARMARK CAMHOOD, L.L.C.(3)
Tampa and Boca Raton, FL;
Newton, MA; Bloomington (2),
Brooklyn Center, Bumsville, 15% interest in a
Eden Prairie (2), Fridley, limited liability
Minnetonka and St. Louis Park, company owning land 1,652,151 $11.06 2,740,860 CPI Feb. 2023 Feb. 2053
MN; Albuquerque, NM (4) and buildings
GALYAN'S TRADING COMPANY(3)
Lombard, IL; Fairfax, VA 100% 197,245 12.65 2,494,204 Stated Dec. 2020 Dec. 2060
SPECTRIAN CORPORATION(3)
Sunnyvale, CA (2) 100% 141,787 15.07 2,136,344 CPI Nov. 2011 Nov. 2026
SPECIAL DEVICES, INC.(3)
Moorpark, CA; Mesa, AZ 50% 249,276 16.36 2,038,514 CPI Jun. 2021 Jun. 2041
PERRY GRAPHIC COMMUNICATIONS AND JUDD'S INCORPORATED(3)
Baraboo and Waterloo, WI 100% 899,476 2.31 2,077,762 Stated Dec. 2017 Dec. 2032
BEST BUY CO., INC.(3)
Fort Collins, CO; Matteson and
Schaumburg, IL; Attleboro, MA; 37% interest in a
Nashua, NH; Albuquerque, NM; general
Arlington, Beaumont, Dallas, partner-ship
Fort Worth and Houston, TX; owning land and 512,278 9.94 1,883,163 Stated Apr. 2018 Apr. 2038
Virginia Beach, VA buildings
WESTELL TECHNOLOGIES, INC.(3)
Aurora, IL 100% 210,877 8.80 1,855,257 Stated Sep. 2017 Sep. 2027
TRUSERV CORPORATION(3)
Kingman, Arizona; Springfield,
Oregon; Fogelsville,
Pennsylvania; Jonesboro, 15% interest in
Georgia; Kansas City, Missouri; three limited
Woodland, California; partnerships owning 3,628,160 3.31 $1,801,073 Stated Dec. 2022 Nov. 2042
Corsicana, Texas land and buildings
-11-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------ ------------------- ---------- ---------- ----------- --------- --------- ---------
MEDICA-FRANCE, SA (3)
Paris, Rueil Malmaison,
Sarcelles, Poissy, Chatou,
and Rosny sous Bois, France 35% 336,889 $14.37 1,694,964(8) INSEE(9) Jun. 2010 Jun. 2010
TELOS CORPORATION
Loudon County, VA 100% 192,775 8.64 1,665,539 CPI Mar. 2016 Mar. 2036
APPLIED MATERIALS, INC. (ETEC SYSTEMS, INC.)(3)
Majority interest
in a limited
Hayward, CA liability company
owning land and 342,233 27.41 $6,285,000 CPI Sep. 2014 Jan. 2030
building(5)
xxCAREER EDUCATION CORPORATION(3)
Mendota Heights, MN 100% 136,400 12.70 1,731,728 Stated May 2011 May 2021
Q CLUBS, INC.(3)
Austin, TX(3) 100% 43,935 17.78 781,169 CPI Jun. 2013 Jun. 2033
Houston, TX 100% 46,733 16.82 786,119 CPI Jul. 2016 Jul. 2036
------ ---------
Total: 90,668 1,567,288
PPD DEVELOPMENT, INC.(3)
Austin, TX 100% 173,436 8.67 1,504,190 CPI Nov. 2010 Nov. 2030
DEL MONTE CORPORATION(3)
Mendota, IL; Plover, Toppenish 50%(6) 735,766 4.02 1,477,713 CPI Jun. 2016 Jun. 2046
and Yakima, WA
SICOR, INC.(3)
50% interest in a
general
San Diego, CA (2) partner-ship
owning land and 144,312 20.41 1,472,736 CPI Jul. 2009 Jul. 2049
buildings
THE UPPER DECK COMPANY(3)
50% interest in a
limited liability
Carlsbad, CA company owning
land and buildings 294,780 9.85 1,452,220 CPI Dec. 2020 Dec. 2040
SILGAN CONTAINERS CORPORATION(3)
Fort Dodge, IA; Oconomowoc 100% 330,561 4.30 1,421,352 CPI Oct. 2014 Oct. 2029
and Menomonie, WI
COMPUCOM SYSTEMS, INC.(3)
33 1/3% interest in
a limited liability
Dallas, TX company owning land
and buildings 242,313 17.43 1,407,903 CPI Apr. 2019 Apr. 2029
THE BON-TON STORES, INC.(3)
Allentown and Johnstown, PA 100% 480,059 3.01 1,443,502 CPI Apr. 2017 Apr. 2047
-12-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------ ------------------- ---------- ---------- ----------- --------- --------- ---------
MCLANE COMPANY, INC.(3)
40% interest in two
Shawnee, KS; Burlington, NJ(3) limited liability
Manassas, VA companies owning
land and buildings 570,468 5.91 1,347,732 CPI Nov. 2015 Nov. 2025
TEXTRON, INC.(3)
50% interest in a
limited liability
Gilbert, AZ company owning land
and building 243,370 10.19 1,239,739 CPI Jan. 2019 Jan. 2039
JEN-COAT, INC.(3)
Westfield, MA (2) 100% 377,500 3.21 1,210,000 CPI Aug. 2021 Aug. 2041
CHILDTIME CHILDCARE, INC.(3)
Chandler, AZ; Fleming Island,
FL; Ackworth, GA; Hauppauge
and Patchogue, NY; New
Territory and Sugarland, TX; 100% 71,372 17.94 1,280,340 CPI Jun. 2017 Jun. 2027
Hampton, VA; Silverdale, WA
ORBSEAL EUROPE I LLC AND ORBSEAL - AUSTRALIA LLC(3)
Richmond, MO 100% 262,528 3.85 1,011,750 CPI Sep. 2021 Sep. 2041
PACIFIC LOGISTICS, L.P.(3)
Dallas, TX 100% 219,614 4.64 1,019,336 CPI Jan. 2019 Jan. 2059
THE GARDEN COMPANIES, INC.(3)
Chattanooga, TN 100% 242,317 3.80 920,292 CPI Jun. 2015 Jun. 2035
SHOPRITE SUPERMARKETS, INC.(3),(4)
45% interest in a
limited partnership Stated/
Ellenville and Warwick, NY ownding land and %of
buildings 136,818 16.40 1,009,426 Sales Oct. 2024 Oct. 2044
GARDEN RIDGE CORPORATION(3)
South Tulsa, OK 100% 141,284 6.65 939,580 CPI Apr. 2016 Apr. 2036
CELADON GROUP, INC.(3)
Indianapolis, IN 100% 76,326 12.05 919,750 CPI Sep. 2021 Sep. 2041
VARIOUS TENANTS
Piscataway, NJ 100% 83,985 9.20 772,682 (7)
NUTRAMAX PRODUCTS, INC.
Houston, TX 100% 253,215 3.49 883,107 CPI Apr. 2013 Apr. 2018
VARIOUS TENANTS
Newark, DE 100% 12,400 15.44 191,394 (7)
Vacant 100% 158,019
-------
170,419
RANDALL INTERNATIONAL, INC.(3)
Carlsbad, CA 100% 88,329 5.66 500,000 Stated Jan. 2016 Jan. 2029
-13-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------ ------------------- ---------- ---------- ----------- --------- --------- ---------
RAVE REVIEWS CINEMAS, L.L.C.(3)
Hickory Creek, TX 100% 57,126 14.21 811,994 CPI Dec. 2020 Dec. 2040
VERMONT TEDDY BEAR CO., INC.(3)
Shelburne, VT 100% 55,446 12.70 703,889 CPI Jul. 2017 Jul. 2032
MILFORD MANUFACTURING SERVICES, L.L.C.(3)
Milford, MA 100% 108,125 6.03 652,034 CPI Jul. 2009 Jul. 2019
BALANCED CARE CORPORATION(3)
Mechanicsburg, PA 100% 41,187 12.79 526,730 CPI Jun. 2014 Jun. 2024
WAL-MART STORES, INC.(3)
Greenfield, IN 100% 82,620 6.14 506,915 Stated Jan. 2010 Jan. 2020
COMPASS BANK FOR SAVINGS(3)
Bourne, Sandwich and Wareham, 100% 19,999 10.25 204,906 CPI Dec. 2017 Dec. 2037
MA
VACANT
San Leandro, CA 100% 432,081
40% interest in a
limited liability
Grand Rapids, MI(10) company owning land
and building 179,461
Ashburn, VA 100% 69,983
Hauppauge, NY 100% 68,333
1. Percentage of ownership in land and building, except as noted. If
ownership is less than 100%, ownership is as a tenant-in-common unless
otherwise indicated.
2. Share of Current Annual Rents is the product of the Square Footage, the
Rent per Square Foot, and the Ownership Interest percentage.
3. These properties are encumbered by mortgage notes payable. 4. Includes
percentage of sales rents.
5. Under the limited liability company agreement, the Company has a 100%
interest in a portion of the leased properties and a 50.01% interest in
the other portion of the property.
6. Mendota, Plover and Toppenish properties are owned through an interest in
a limited liability company and the Yakima property is owned as a
tenant-in-common.
7. Subject to short-term leases.
8. Based on exchange rates at December 31, 2003.
9. INSEE construction index, an index published quarterly by the French
Government.
10. A lease with The Retail Distribution Group, Inc. is effective as of
January 1, 2004.
Item 3. Legal Proceedings.
As of the date hereof, Registrant is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2003 to a vote of security holders, through the solicitation of proxies or
otherwise.
-14-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to the Company's common equity is hereby incorporated
by reference to page 31 of Registrant's Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of the
Company's Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 2 to 10 of the Company's Annual Report contained in Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
Market risk is the exposure to loss resulting from changes in interest rates,
credit spreads, foreign currency exchange rates and equity prices. In pursuing
our business plan, the primary market risks to which we are exposed are interest
rate risk and currency exchange rates.
The value of our real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect our ability to refinance our
debt when balloon payments are scheduled.
All of the Company's $184,206,000 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 December 31, 2003 ranged from 6.50% to 8.75%
per annum.
(in thousands)
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $5,953 $10,447 $11,539 $24,546 $22,553 $109,168 $184,206 $186,724
Weighted average
interest rate 7.40% 7.72% 7.75% 7.58% 6.95% 7.59%
The Company's credit facility matured in October 2003.
CPA(R):12 has ownership interests in properties in France. The foreign
operations are not material to CPA(R):12's consolidated financial position,
results of operations or cash flow during the three-year period ended December
31, 2003. CPA(R):12 was not subject to material foreign currency exchange rate
risk; however, it is expected to cause some fluctuation in the results of
operations or cash flow. To date, CPA(R):12 has not entered into any foreign
currency exchange contracts or other derivative financial instruments to hedge
the effects of adverse fluctuations in foreign currency exchange rates.
-15-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 8. Consolidated Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data of
Registrant are hereby incorporated by reference to pages 11 to 30 of the
Company's Annual Report contained in Appendix A:
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of December 31, 2003 and 2002.
(iii) Consolidated Statements of Income for the years ended December 31, 2003,
2002 and 2001.
(iv) Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2001, 2002 and 2003.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001.
(vi) Notes to Consolidated Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
The Co-Chief Executive Officers and Chief Financial Officer of the Company
have conducted a review of the Company's disclosure controls and
procedures as of December 31, 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 chief executive
officers and chief financial officer, to allow timely decisions regarding
required disclosure and to ensure that such information is recorded,
processed, summarized and reported, within the required time periods.
Based upon this review, the Company's co-chief executive officers and
chief financial officer have concluded that the Company's disclosure
controls (as defined in pursuant to Rule 13a-14(c) promulgated under the
Exchange Act) are sufficiently effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is recorded, processed, summarized and reported with adequate
timeliness. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation referred to above.
-16-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services.
This information will be contained in Registrant's definitive Proxy Statement
with respect to the Company's Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
-17-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a
part of this Report:
Report of Independent Auditors.
Consolidated Balance Sheets, December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended December
31, 2003, 2002, and 2001.
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 2001, 2002, and 2003.
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated
by reference to pages 11 to 30 of the Company's Annual Report
contained in Appendix A.
(a) 2. Financial Statement Schedules:
The following schedules are filed as a part of this Report:
Report of Independent Auditors.
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 2003.
Schedule III of the Company is contained on pages 29 to 33 of
this Form 10-K.
Financial Statement Schedules other than those listed above
are omitted because the required information is given in the
Consolidated Financial Statements, including the Notes
thereto, or because the conditions requiring their filing do
not exist.
-18-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
(a) 3. Exhibits:
The following exhibits are filed as part of this Report.
Documents other than those designated as being filed herewith
are incorporated herein by reference.
Exhibit No. Description Method of Filing
----------- ----------- ----------------
1.1 Notice to brokers dated January 6, 2003 issued by the Company Filed as Exhibit 1(A) to Registrant's
Schedule 14D-9 dated January 8, 2003
1.2 Notice to shareholders dated January 6, 2003 issued by the Company Filed as Exhibit 1(B) to Registrant's
Schedule 14D-9 dated January 8, 2003
3.1 Articles of Incorporation of Registrant. Exhibit 3(A) to Registration Statement
(Form S-11) No. 33-68728
3.2 Bylaws of Registrant. Exhibit 3(B) to Registration Statement
(Form S-11) No. 33-68728
10.1 Advisory Agreement between Registrant and Carey Property Advisors. Exhibit 10(A) to Registration
Statement (Form S-11) No. 33-68728
10.2 Lease Agreement dated October 8, 1993 between Elwa-BV (NY) QRS 11-24, Filed as Exhibit 10.2 to Registrant's
Inc., as Landlord, and Big V Supermarkets, Inc., as Tenant. Form 10-K dated March 30, 1995
10.3 Amendment to Lease Agreement dated July 15, 1994 by and between Elwa-BV Filed as Exhibit 10.3 to Registrant's
(NY) QRS 11-24, Inc. and Big V Supermarkets, Inc. Form 10-K dated March 30, 1995
10.4 Amended and Restated Mortgage and Security Agreement dated October 8, Filed as Exhibit 10.4 to Registrant's
1993 from Elwa-BV (NY) QRS 11-24, Inc., as Mortgagor, to Key Bank of Form 10-K dated March 30, 1995
New York.
10.5 $7,500,000 Amended, Restated and Consolidated Bonds dated October 8, Filed as Exhibit 10.5 to Registrant's
1993. Form 10-K dated March 30, 1995
10.6 Modification and Assumption Agreement dated July 15, 1994 among Elwa-BV Filed as Exhibit 10.6 to Registrant's
(NY) QRS 11-24, Inc., Elwa-BV (NY) QRS 12-3, Inc. and Key Bank of New Form 10-K dated March 30, 1995
York, as Lender.
10.7 Lease dated April 15, 1993 between BB Property Company, as Lessor, and Filed as Exhibit 10.7 to Registrant's
Best Buy Co., Inc., as Lessee. Form 10-K dated March 30, 1995
10.11 Owner's Lien Agreement dated April 15, 1993 by Corporate Property Filed as Exhibit 10.11 to Registrant's
Associates 10 Incorporated ("CPA(R):10") and Carey Institutional Form 10-K dated March 30, 1995
Properties Incorporated ("CIP(TM)"), for the benefit of Teachers Insurance
and Annuity Association of America.
10.12 First Amendment to Owner's Lien Agreement dated May 27, 1994 by Filed as Exhibit 10.12 to Registrant's
CPA(R):10, CIP(TM) and Registrant for the benefit of Teachers Insurance and Form 10-K dated March 30, 1995
Annuity Association of America.
10.13 $3,353,745 Limited Obligation Promissory Note dated May 13, 1994 from Filed as Exhibit 10.13 to Registrant's
BBC (NE) QRS 12-2, Inc., as Borrower, to Registrant, as Lender. Form 10-K dated March 30, 1995
10.14 Lease Agreement dated December 21, 1993 by and between GENA Property Filed as Exhibit 10.14 to Registrant's
Company, as Landlord, and Gensia, Inc., as Tenant. Form 10-K dated March 30, 1995
-19-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.15 Deed of Trust, Security Agreement and Financing Statement dated Filed as Exhibit 10.15 to Registrant's
December 21, 1993 between GENA Property Company, as Trustor, and The Form 10-K dated March 30, 1995
Northwestern Mutual Life Insurance Company, as Trustee.
10.16 $13,000,000 Promissory Note dated December 21, 1993 from GENA Property Filed as Exhibit 10.16 to Registrant's
Company, as Obligor, to The Northwestern Mutual Life Insurance Company, Form 10-K dated March 30, 1995
as Obligee.
10.17 Lease Agreement dated February 1, 1995 by and between ESI (CA) QRS Filed as Exhibit 10.17 to Registrant's
12-6, Inc., as Landlord, and ETEC Systems, Inc., as Tenant. Form 8-K dated June 23, 1995
10.18 Deed of Trust, Assignment of Rents and Security Agreement dated Filed as Exhibit 10.18 to Registrant's
February 1, 1995 by ESI (CA) QRS 12-6, Inc., as Trustor, in favor of Form 8-K dated June 23, 1995
First American Title Insurance Company, as Trustee, for the benefit of
Creditanstalt-Bankverein, as Beneficiary.
10.19 $6,350,000 Real Estate Note dated February 1, 1995 by ESI (CA) QRS Filed as Exhibit 10.19 to Registrant's
12-6, Inc., as Maker, to Creditanstalt- Bankverein, as Holder. Form 8-K dated June 23, 1995
10.20 Lease dated July 3, 1994 by and between Greenwalt Development, Inc., as Filed as Exhibit 10.20 to Registrant's
Landlord, and Wal-Mart Stores, Inc., as Tenant. Form 8-K dated June 23, 1995
10.21 Assignment and Assumption of Lease dated February 10, 1995 by and Filed as Exhibit 10.21 to Registrant's
between Greenwalt Development, Inc., as Assignor, and WALS (IN) QRS Form 8-K dated June 23, 1995
12-5, Inc., as Assignee.
10.22 Estoppel Certificate dated February 9, 1995 from Wal-Mart Stores, Inc. Filed as Exhibit 10.22 to Registrant's
to WALS (IN) QRS 12-5, Inc. Form 8-K dated June 23, 1995
10.23 Lease Agreement dated June 8, 1995 by and between SFC (TX) QRS 12-7, Filed as Exhibit 10.23 to Registrant's
Inc., as Landlord, and Sports & Fitness Clubs of America, Inc., as Form 8-K dated June 23, 1995
Tenant.
10.24 Loan Agreement dated June 8, 1995 by and between SFC (TX) QRS 12-7, Filed as Exhibit 10.24 to Registrant's
Inc., as Borrower, and Bank One, Texas, N.A. Form 8-K dated June 23, 1995
10.25 $2,750,000 Note dated June 8, 1995 from SFC (TX) QRS 12-7, Inc. to Bank Filed as Exhibit 10.25 to Registrant's
One, Texas, N.A. Form 8-K dated June 23, 1995
10.26 Deed of Trust and Security Agreement dated June 8, 1995 from SFC (TX) Filed as Exhibit 10.26 to Registrant's
QRS 12-7, Inc., as Mortgagor, to Mr. Brian J. Tuerff, as Trustee, for Form 8-K dated June 23, 1995
Bank One, Texas, N.A., as Mortgagee.
10.27 Lease Agreement dated June 20, 1995 by and between Bud Limited Filed as Exhibit 10.27 to Registrant's
Liability Company, as Landlord, and NK Lawn & Garden Co., as Tenant. Form 8-K dated June 23, 1995
10.28 Construction Agency Agreement dated October 31, 1995 between Del Monte Filed as Exhibit 10.28 to Registrant's
Corporation and DELMO (PA) QRS 11-36 and DELMO (PA) QRS 12-10. Form 8-K dated November 27, 1995
10.29 Lease Agreement dated October 31, 1995 by and between DELMO (PA) QRS Filed as Exhibit 10.29 to Registrant's
11-36 and DELMO (PA) QRS 12-10, collectively, as Landlord, and Del Form 8-K dated November 27, 1995
Monte Corporation, as Tenant.
-20-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.30 Lease Agreement dated November 13, 1995 by and between ABI (TX) QRS Filed as Exhibit 10.30 to Registrant's
12-11, Inc., as Landlord, and Pharmaco LSR International Inc., as Form 8-K dated November 27, 1995
Tenant.
10.31 Lease Agreement dated December 26, 1995 by and between Cards Limited Filed as Exhibit 2.1 to Registrant's
Liability Company, as Landlord, and The Upper Deck Company, as Tenant. Form 8-K dated February 2, 1996
10.32 $15,000,000 Promissory Note dated January 3, 1996 from Cards Limited Filed as Exhibit 2.2 to Registrant's
Liability Company to Column Financial, Inc. Form 8-K dated February 2, 1996
10.33 Lease Agreement dated February 23, 1996 by and between RSI (NJ) QRS Filed as Exhibit 2.1 to Registrant's
12-13, Inc., as Landlord, and Rheometric Scientific, Inc., as Tenant. Form 8-K dated March 9, 1996
10.34 $3,300,000 Promissory Note dated February 23, 1996 from RSI (NJ) QRS Filed as Exhibit 2.2 to Registrant's
12-13, Inc. to NatWest Bank N.A. Form 8-K dated March 9, 1996
10.35 Stock Purchase Warrant for 132,617 Shares of Rheometric Scientific, Filed as Exhibit 2.3 to Registrant's
Inc. Common Stock. Form 8-K dated March 9, 1996
10.36 Stock Purchase Warrant for 331,543 Shares of Rheometric Scientific, Filed as Exhibit 2.4 to Registrant's
Inc. Common Stock. Form 8-K dated March 9, 1996
10.37 Lease Agreement dated March 11, 1996 by and between TEL (VA) QRS 12-15, Filed as Exhibit 10.41 to Registrant's
Inc., as Landlord, and Telos Corporation, a Maryland corporation, Telos Post-Effective Amendment No. 3 dated
Corporation, a California corporation, Telos Field Engineering, Inc., a March 6, 1997
Delaware corporation, and Telos International Corp., a Delaware
corporation, as Tenants.
10.41 Lease Agreement dated July 23, 1996 by and between SFC (TX) QRS 12-18, Filed as Exhibit 10.45 to Registrant's
Inc., as Landlord, and Sports & Fitness Clubs of America, Inc., as Post-Effective Amendment No. 3 dated
Tenant. March 6, 1997
10.42 Stock Purchase Warrant for 5,089 Shares of Q Clubs, Inc. Common Stock. Filed as Exhibit 10.46 to Registrant's
Post-Effective Amendment No. 3 dated
March 6, 1997
10.43 Guaranty and Suretyship Agreement made by Celadon Group, Inc. to QRS Filed as Exhibit 10.47 to Registrant's
12-17, Inc. Post-Effective Amendment No. 3 dated
March 6, 1997
10.44 Lease Agreement dated September 19, 1996 by and between CEL (IN) QRS Filed as Exhibit 10.48 to Registrant's
12-17, Inc., as Landlord, and Celadon Trucking Services, Inc., as Post-Effective Amendment No. 3 dated
Tenant. March 6, 1997
10.45 Lease Agreement dated November 19, 1996 by and between SPEC (CA) QRS Filed as Exhibit 10.49 to Registrant's
12-20, Inc., as Landlord, and Spectrian Corporation, as Tenants. Post-Effective Amendment No. 3 dated
March 6, 1997
10.46 Lease Agreement dated December 24, 1996 by and between NOG (NY) QRS Filed as Exhibit 10.50 to Registrant's
12-23, Inc., as Landlord, and Knogo North America, Inc., as Tenants. Post-Effective Amendment No. 3 dated
March 6, 1997
10.47 Amendment to Lease dated December 14, 1996 by and between WEEDS (OK) Filed as Exhibit 10.51 to Registrant's
QRS 12-22, Inc., as Landlord, and Garden Ridge, L.P., as Tenant. Post-Effective Amendment No. 3 dated
March 6, 1997
-21-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.48 Mortgage Assignment of Rents and Security Agreement dated December 27, Filed as Exhibit 10.52 to Registrant's
1996 between WEEDS (OK) QRS 12-22, Inc., Mortgagor, and GMAC Commercial Post-Effective Amendment No. 3 dated
Mortgage Corporation. March 6, 1997
10.49 Lease Agreement dated January 23, 1997 by and between BUILD (CA) QRS Filed as Exhibit 10.53 to Registrant's
12-24, Inc., as Landlord, and Scott Corporation, as Tenants. Post-Effective Amendment No. 3 dated
March 6, 1997
10.50 Lease agreement dated July 8, 1997 by and between GGAP (MA) QRS 12-31, Filed as Exhibit 10.1 to Registrant's
Inc., as Landlord, and PAGG Corporation, as Tenants. Form 8-K dated June 13, 1997
10.51 Lease agreement dated July 10, 1997 by and between URSA (VT) QRS 12-30, Filed as Exhibit 10.2 to Registrant's
Inc., as Landlord, and The Vermont Teddy Bear Company, as Tenants. Form 8-K dated June 13, 1997
10.52 Lease agreement dated April 10, 1997 by and between BT (PA) QRS 12-25, Filed as Exhibit 10.3 to Registrant's
Inc., as Landlord, and The Bon-Ton Department Stores, Inc., as Tenants. Form 8-K dated June 13, 1997
10.53 Lease agreement dated June 13, 1997 by and between CAN (WI) QRS 12-34, Filed as Exhibit 10.4 to Registrant's
Inc., as Landlord, and Silgan Containers Corporation, as Tenants. Form 8-K dated June 13, 1997
10.54 Lease agreement dated September 30, 1997 by and between CPA(R):12, Inc. Filed as Exhibit 10.1 to Registrant's
as Landlord, and Westell, Inc., as Tenant. Form 8-K dated March 31, 1998
10.55 Lease agreement dated November 26, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.2 to Registrant's
Landlord, and Randall International, as Tenant. Form 8-K dated March 31, 1998
10.56 Lease agreement dated December 31, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.3 to Registrant's
Landlord, and Sandwich Cooperative Bank, as Tenant. Form 8-K dated March 31, 1998
10.57 Lease agreement dated November 12, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.4 to Registrant's
Landlord, and Brown Institute, Ltd., as Tenant. Form 8-K Dated March 31, 1998
10.58 Lease agreement dated September 25, 1997 by and between CPA(R):12, Inc. Filed as Exhibit 10.5 to Registrant's
as Landlord, and GDE Systems, Inc., as Tenant. Form 8-K dated March 31, 1998
10.59 Lease agreement dated July 8, 1997 by and between CPA(R):12, Inc. as Filed as Exhibit 10.6 to Registrant's
Landlord, and PAGG Corporation, as Tenant. Form 8-K dated March 31, 1998
10.60 Lease agreement dated September 23, 1997 by and between CPA(R):12, Inc. Filed as Exhibit 10.7 to Registrant's
as Landlord, and Texas Freezer Company, Inc., as Tenant. Form 8-K dated March 31, 1998
10.61 Lease agreement dated February 3, 1998 by and between CPA(R):12, Inc. and Filed as Exhibit 10.8 to Registrant's
CPA:14, Inc., as Landlords, and Etec Systems, Inc., as Tenant. Form 8-K dated March 31, 1998
10.62 Lease agreement dated December 16, 1997 by and between CPA(R):12, Inc., Filed as Exhibit 10.9 to Registrant's
as Landlord, and Perry Graphic Communications, Inc., as Tenant. Form 8-K dated March 31, 1998
21.1 Subsidiaries of Registrant as of March 11, 2004 Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
28.1 Limited Guaranty of Payment dated October 8, 1993 from CIP(TM), as Filed as Exhibit 28.1 to Registrant's
Guarantor, to Key Bank of New York, as Lender. Form 10-K dated March 30, 1995
-22-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Exhibit No. Description Method of Filing
----------- ----------- ----------------
28.2 Amendment to Limited Guaranty of Payment dated July 15, 1994 among CIP(TM) Filed as Exhibit 28.2 to Registrant's
and Registrant, Guarantors, and Key Bank of New York, as Lender. Form 10-K dated March 30, 1995
28.3 Guaranty and Suretyship Agreement dated June 8, 1995 by Sports & Filed as Exhibit 28.3 to Registrant's
Fitness Clubs, Inc., as Guarantor, to SFC (TX) QRS 12-7, Inc., as Form 8-K dated June 23, 1995
Landlord.
28.4 Environmental Risk Agreement dated June 8, 1995 by SFC (TX) QRS 12-7, Filed as Exhibit 28.4 to Registrant's
Inc., as Indemnitor, to Bank One, Texas, N.A., as Lender. Form 8-K dated June 23, 1995
28.5 Guaranty and Suretyship Agreement dated June 20, 1995 by The Garden Filed as Exhibit 28.5 to Registrant's
Companies, Inc., as Guarantor, to Bud Limited Liability Company. Form 8-K dated June 23, 1995
28.6 Guaranty and Suretyship Agreement dated October 31, 1995 by Del Monte Filed as Exhibit 28.6 to Registrant's
Foods Corporation, as Guarantor, to DELMO (PA) QRS 11-36 and DELMO (PA) Form 8-K dated November 27, 1995
QRS 12-10, collectively, as Landlord.
28.7 Guaranty and Suretyship Agreement dated November 13, 1995 by Applied Filed as Exhibit 28.7 to Registrant's
Bioscience International, Inc., as Guarantor, to ABI (TX) QRS 12-11, Form 8-K dated November 27, 1995
Inc., as Landlord.
31.1 Certification of Co-Chief Executive Officers Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith
32.1 Section 906 Certification of Co-Chief Executive Officers Filed herewith
32.2 Section 906 Certification of Chief Financial Officer Filed herewith
(b) Reports on Form 8-K
During the year ended December 31, 2003 the Registrant was not
required to file any reports on Form 8-K.
-23-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
a Maryland corporation
3/10/04 BY: /s/ John J. Park
- -------------- ---------------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
3/10/04 BY: /s/ William Polk Carey
- -------------- ------------------------------------
Date William Polk Carey
Chairman of the Board, Co-Chief Executive
Officer and Director (Principal
Executive Officer)
3/10/04 BY: /s/ Gordon F. DuGan
- -------------- ------------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board, Co-Chief
Executive Officer, Senior Managing
Director and Chief Acquisitions Officer
3/10/04 BY: /s/ Elizabeth P. Munson
- -------------- ------------------------------------
Date Elizabeth P. Munson
Director
3/10/04 BY: /s/ Charles E. Parente
- -------------- ------------------------------------
Date Charles E. Parente
Director
3/10/04 BY: /s/ William Ruder
- -------------- ------------------------------------
Date William Ruder
Director
3/10/04 BY: /s/ George E. Stoddard
- -------------- ------------------------------------
Date George E. Stoddard
Director
3/10/04 BY: /s/ John J. Park
- -------------- ------------------------------------
Date John J. Park
Managing Director and Chief Financial
Officer (Principal Financial Officer)
3/10/04 BY: /s/ Claude Fernandez
- -------------- ------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting
Officer (Principal Accounting Officer)
-24-
REPORT of INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Corporate Property Associates 12 Incorporated:
Our audits of the consolidated financial statements referred to in our report
dated March 10, 2004 appearing in the 2003 Annual Report to Shareholders of
Corporate Property Associates 12 Incorporated (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 10, 2004
-25-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized
Personal Subsequent to Decrease in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Operating Method:
Distribution facility
leased to Wal-Mart
Stores, Inc. $ 1,867,136 $ 452,871 $ 3,325,909 $ 715,114
Office/Manufacturing
facility leased to
Applied Materials, Inc. 35,861,807 1,272,418 10,588,221 66,962,157 $(2,633,473)
Health clubs leased to Q
Clubs, Inc. 4,252,948 3,152,874 8,524,126
Warehouse/office/research
facility leased to PPD
Development, Inc. 5,876,808 1,550,928 11,017,367 27,856
Office/manufacturing
facility leased to
Proterion Corporation,
Inc. and various tenants 5,329,120 1,510,791 4,789,209 4,500 (444,949)
Research and development
facility in Newark,
Delaware partially
leased to various
short-term tenants 1,390,120 7,281,878 13,423 (5,281,421)
Distribution/warehouse
leased to Celadon
Group, Inc. 2,063,149 1,480,600 5,320,400 943,061
Office/research facility
leased to Spectrian
Corporation 8,202,479 5,570,775 12,073,204 4,119
Retail store leased to
Garden Ridge Corporation 5,412,511 1,857,607 6,204,923
Vacant office/research
facility in San
Leandro, California 8,502,634 5,734,782 12,175,218 5,356
Child care centers leased
to Childtime Childcare,
Inc. 6,749,080 2,581,896 7,459,165
Retail/distribution
facility leased to The
Bon-Ton Stores, Inc. 5,886,142 1,780,000 10,261,885
Technology/manufacturing
facilities leased to
Silgan Containers
Corporation 7,107,508 758,670 11,630,675 111,090
Facility leased to
Milford Manufacturing
Services, LLC 2,686,038 1,080,000 4,469,738
Gross Amount at which Carried
at Close of Period (d)
----------------------
Life on
which
Depreciation
in Latest
Accumulated Statement of
Personal Depreciation Date Income
Description Land Buildings Property Total (d) (d) Acquired is Computed
----------- ---- --------- -------- --------- --- -------- ------------
Operating Method:
Distribution facility
leased to Wal-Mart
Stores, Inc. $ 454,420 $ 4,039,474 $ 4,493,894 $ 744,117 2/10/1995 40 yrs.
Office/Manufacturing
facility leased to
Applied Materials, Inc. 1,272,444 74,916,879 76,189,323 10,083,726 2/16/1995 40 yrs.
6/8/1995
Health clubs leased to Q and
Clubs, Inc. 3,152,874 8,524,126 11,677,000 1,691,896 7/25/1996 40 yrs.
Warehouse/office/research
facility leased to PPD
Development, Inc. 1,550,985 11,045,166 12,596,151 2,242,979 11/13/1995 40 yrs.
Office/manufacturing
facility leased to
Proterion Corporation,
Inc. and various tenants 1,065,843 4,793,708 5,859,551 114,849 2/23/1996 40 yrs.
Research and development
facility in Newark,
Delaware partially
leased to various
short-term tenants 1,391,311 2,012,689 3,404,000 475,992 3/28/1996 40 yrs.
Distribution/warehouse
leased to Celadon
Group, Inc. 1,480,600 6,263,461 7,744,061 1,013,551 6/19/1996 40 yrs.
Office/research facility
leased to Spectrian
Corporation 5,570,775 12,077,323 17,648,098 2,151,157 11/19/1996 40 yrs.
Retail store leased to
Garden Ridge Corporation 1,857,607 6,204,923 8,062,530 1,092,325 12/16/1996 40 yrs.
Vacant office/research
facility in San
Leandro, California 5,734,782 12,180,574 17,915,356 2,118,912 12/24/1996 40 yrs.
Child care centers leased
to Childtime Childcare,
Inc. 2,581,896 7,459,165 10,041,061 1,040,534 1/29/1997 40 yrs.
Retail/distribution
facility leased to The
Bon-Ton Stores, Inc. 1,780,000 10,261,885 12,041,885 1,721,004 4/10/1997 40 yrs.
Technology/manufacturing
facilities leased to
Silgan Containers
Corporation 758,670 11,741,765 12,500,435 1,836,410 6/13/1997 40 yrs.
Facility leased to
Milford Manufacturing
Services, LLC 1,080,000 4,469,738 5,549,738 721,136 7/8/1997 40 yrs.
-26-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized
Personal Subsequent to Decrease in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Operating Method:
Office/manufacturing
facility leased to
Vermont Teddy Bear Co.,
Inc. 2,766,049 1,465,000 4,398,874 1,640 (43,950)
Warehouse/special
facility leased to
Pacific Logistics, L.P. 4,093,424 257,458 $1,109,900 7,150,544
Office/manufacturing
facility leased to
Westell Technologies,
Inc. 11,182,732 2,500,000 14,952,055
Office/manufacturing
facility leased to
Randall International,
Inc. 5,450,747 2,000,000 471,454 5,104,034 (12,370)
Administration/classroom
facility leased to
Career Education
Corporation 7,230,265 1,150,000 8,840,486 2,788,170
Printing facility leased
to Perry Graphic
Communications, Inc.
and Judd's 10,021,445 642,000 18,467,948 8,000
Office/banking facility
leased to Compass Bank
for Savings 1,597,456 300,000 1,520,000
Manufacturing/distribution
facility leased to
Nutramax Products, Inc. 1,160,000 6,127,722 709,688
Office facility leased to
Balanced Care
Corporation 2,673,104 558,600 4,291,443
Retail/services
facilities leased to
Galyan's Trading Company 16,097,686 8,070,000 16,134,421 57,241
Movie theater leased to
Rave Reviews Cinemas,
LLC. 4,320,518 1,760,000 5,176,372
Manufacturing/warehouse
facilities leased to
Jen-Coat, Inc. 7,011,989 1,193,200 10,325,125 2,447
Industrial/manufacturing
facility leased to
Orbseal, LLC. 6,064,172 760,000 9,187,644 250 (79,274)
------------ ----------- ------------ ---------- ----------- -----------
$178,306,947 $51,990,590 $203,264,854 $1,109,900 $96,359,298 $(8,495,437)
============ =========== ============ ========== =========== ===========
Gross Amount at which Carried
at Close of Period (d)
----------------------
Life on
which
Depreciation
in Latest
Accumulated Statement of
Personal Depreciation Date Income
Description Land Buildings Property Total (d) (d) Acquired is Computed
----------- ---- --------- -------- --------- --- -------- ------------
Operating Method:
Office/manufacturing
facility leased to
Vermont Teddy Bear Co.,
Inc. 1,421,050 4,400,514 5,821,564 710,481 7/18/1997 40 yrs.
Warehouse/special
facility leased to
Pacific Logistics, L.P. 257,458 7,150,544 $1,109,900 8,517,902 1,794,800 9/23/1997 7 to 40 yrs.
Office/manufacturing
facility leased to
Westell Technologies,
Inc. 2,500,000 14,952,055 17,452,055 2,351,834 9/29/1997 40 yrs.
Office/manufacturing
facility leased to
Randall International,
Inc. 2,000,000 5,563,118 7,563,118 202,822 10/17/1997 40 yrs.
Administration/classroom
facility leased to
Career Education
Corporation 1,150,000 11,628,656 12,778,656 1,689,208 11/12/1997 40 yrs.
Printing facility leased
to Perry Graphic
Communications, Inc.
and Judd's 642,000 18,475,948 19,117,948 2,790,630 12/16/1997 40 yrs.
Office/banking facility
leased to Compass Bank
for Savings 300,000 1,520,000 1,820,000 228,000 12/30/1997 40 yrs.
Manufacturing/distribution
facility leased to
Nutramax Products, Inc. 1,160,000 6,837,410 7,997,410 954,199 3/28/1998 40 yrs.
Office facility leased to
Balanced Care
Corporation 558,600 4,291,443 4,850,043 454,523 6/23/1998 40 yrs.
Retail/services
facilities leased to
Galyan's Trading Company 8,070,000 16,191,662 24,261,662 1,433,637 6/29/2000 40 yrs.
Movie theater leased to
Rave Reviews Cinemas,
LLC. 1,760,000 5,176,372 6,936,372 382,836 12/7/2000 40 yrs.
Manufacturing/warehouse
facilities leased to
Jen-Coat, Inc. 1,193,200 10,327,572 11,520,772 612,764 8/15/2001 40 yrs.
Industrial/manufacturing
facility leased to
Orbseal, LLC. 760,000 9,108,620 9,868,620 521,834 9/28/2001 40 yrs.
------------ ------------ ---------- ------------ -----------
$ 51,504,515 $291,614,790 $1,109,900 $344,229,205 $41,176,156
============ ============ ========== ============ ===========
See accompanying notes to Schedule.
-27-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Gross Amount at which
Initial Cost to Company Carried
----------------------- at Close of Period
------------------
Costs
Capitalized
Subsequent to
Description Encumbrances Land Buildings Acquisition (a) Total Date Acquired
----------- ------------ ---- --------- --------------- ----- -------------
Direct Financing Method:
Manufacturing facility
leased to The Garden
Companies, Inc. $2,674,253 $1,544,265 $ 5,430,735 $ 6,975,000 6/20/1995
Office facility leased to
Telos Corporation 1,549,022 10,597,978 5,500 12,152,500 3/11/1996
---------- ---------- ----------- ------ -----------
$2,674,253 $3,093,287 $16,028,713 $5,500 $19,127,500
========== ========== =========== ====== ===========
See accompanying notes to Schedule
-28-
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and
acquisition costs including legal fees, appraisal fees, title costs and
other related professional fees.
(b) Represents (i) partial refund of purchase price, (ii) impairment charges,
and (iii) the sale of real estate.
(c) At December 31, 2003, the aggregate cost of real estate owned by
Registrant and its subsidiaries for Federal income tax purposes is
$315,867,815.
(d)
Reconciliation of Real Estate Accounted
for Under the Operating Method
December 31,
---------------------------------------
2003 2002
---- ----
Balance at beginning of year $350,424,262 $341,780,814
Additions 702,191 1,080,330
Impairment charge (1,000,000) --
Reclassification to assets held for sale (11,756,799) --
Reclassification from net investment in direct
financing leases 5,859,551 7,563,118
------------ ------------
Balance at close of year $344,229,205 $350,424,262
============ ============
Reconciliation of Accumulated Depreciation
December 31,
------------------------------------------
2003 2002
---- ----
Balance at beginning of year $ 34,815,471 $ 27,327,123
Depreciation expense 7,664,081 7,488,348
Reclassification to assets held for sale (1,303,396) --
------------ ------------
Balance at close of year $ 41,176,156 $ 34,815,471
============ ============
-29-
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
2003 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except share amounts)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
OPERATING DATA:
Revenues $ 47,732 $ 45,295 $ 44,702 $ 43,603 $ 38,260
Income from continuing
operations(1) 21,480 15,609 26,872 23,920 19,069
Basic earnings from
continuing operations per
share .71 .52 .90 .83 .67
Net income 21,501 16,650 27,948 25,010 19,871
Basic earnings per share(2) .71 .55 .94 .87 .69
Weighted average number of
shares outstanding-basic 30,234,073 30,038,268 29,763,716 28,685,620 28,615,971
Dividends paid 24,960 24,692 24,205 23,435 23,268
Dividends paid per share .83 .82 .82 .82 .81
Payments of mortgage
principal(3) 5,529 4,981 4,416 3,998 3,400
BALANCE SHEET DATA:
Total consolidated assets 462,191 472,129 447,241 441,209 418,088
Long-term obligations(4) 183,443 189,166 166,446 145,547 133,351
(1) Includes gain from sale of real estate.
(2) The Company has a simple equity capital structure with only common stock
outstanding. As a result, the Company has presented basic per share
amounts only.
(3) Represents scheduled mortgage principal amortization paid.
(4) Represents mortgage obligations and deferred acquisition fees due after
more than one year.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 12 Incorporated ("CPA(R):12") should
be read in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2003. The following discussion includes
forward looking statements. Forward looking statements, which are based on
certain assumptions, describe future plans, strategies and expectations of
CPA(R):12. Forward-looking statements discuss matters that are not historical
facts. Because they discuss future events or conditions, forward-looking
statements may include words such as "anticipate", "believe", "estimate",
"intend", "could", "should", "would", "may", or similar expressions. Do not
unduly rely on forward looking statements. They give our expectations about the
future and are not guarantees, and speak only as of the date they are made. Such
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievement of CPA(R):12 to be
materially different from the results of operations or plan expressed or implied
by such forward looking statements. The risk factors are fully described in Item
1 of this Annual Report on Form 10-K. Accordingly, such information should not
be regarded as representations by CPA(R):12 that the results or conditions
described in such statements or objectives and plans of CPA(R):12 will be
achieved.
CPA(R):12 was formed in 1993 for the purpose of engaging in the business of
investing in and owning commercial and industrial real estate. Substantially all
of CPA(R):12's net leases have been structured to place certain economic burdens
of ownership on these corporate tenants by requiring them to pay the costs of
maintenance and repair, insurance and real estate taxes. The lease obligations
are unconditional. If possible, CPA(R):12 also negotiates guarantees of the
obligations from the parent company of the lessees. The leases have generally
been structured to include periodic rent increases that are stated or based on
increases in the Consumer Price Index ("CPI") or, for certain retail properties,
may provide for additional rents based on sales in excess of a specified base
amount. In addition to investing directly, CPA(R):12 may also acquire interests
in real estate through joint ventures. These joint ventures are generally with
affiliates.
As a real estate investment trust ("REIT"), CPA(R):12 is not subject to federal
income taxes on amounts distributed to shareholders provided it meets certain
conditions including distributing at least 90% of its REIT taxable income to its
shareholders. CPA(R):12's primary objectives are to provide increasing
distributions and to protect its investors from the effects of inflation through
rent escalation provisions, property appreciation, tenant credit improvement and
regular paydown of limited recourse mortgage debt. In addition, CPA(R):12 has
successfully negotiated grants of common stock warrants from selected tenants
and expects to realize the benefits of appreciation from those grants. CPA(R):12
cannot guarantee that its objectives will be ultimately realized.
CPA(R):12 is advised by W. P. Carey & Co. LLC ("WPC") pursuant to an Advisory
Agreement. CPA(R):12's contract with WPC is renewable annually by Independent
Directors who are elected by CPA(R):12's shareholders. In connection with each
renewal, WPC is required to provide the Independent Directors with a comparison
of the fee structure with several similar companies. The Advisory Agreement also
provides that an independent portfolio valuation be performed annually. The
portfolio valuation is used to determine the asset base for calculating asset
management and performance fees.
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.
Management evaluates the results of CPA(R):12 with a primary focus on the
ability to generate cash flow necessary to meet its investment objectives of
overall property appreciation and increasing its distribution rate to its
shareholders. As a result, Management's assessment of operating results gives
less emphasis to the effect of unrealized gains and losses which may cause
fluctuations in net income for comparable periods but has no impact on cash flow
and to
2
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
other noncash charges such as depreciation and impairment charges. While
impairment charges are intended to reflect an actual or potential decrease in
the value of an asset, accounting principles do not permit increasing an asset
to fair value when such fair value exceeds the asset's carrying value
(historical costs less accumulated depreciation). Based on annual independent
valuations, Management believes that there has been an increase in the value of
the portfolio and that this increase is not reflected in its financial
statements. In evaluating cash flow from operations, Management includes equity
distributions that are included in investing activities to the extent that the
distributions in excess of equity income are the result of noncash charges such
as depreciation. For the year ended December 31, 2003, cash flow generated from
operations and equity investments was substantially greater than dividends paid
but such cash flow was not sufficient to fully fund distributions to minority
partners, that is, to affiliates who have interests in investments that are
included in the Company's consolidated financial statements, and scheduled
mortgage principal payments. Cash flow generated was $31,223,000 and the uses
were $31,932,000, a net operating shortfall of $709,000. CPA(R):12 has cash
balances of $13,305,000 which is in excess of what we believe is necessary to
sustain operations. In determining the distribution rate to shareholders,
Management considers its projections of future operations as well as its
historical results. CPA(R):12 is addressing challenges at several
underperforming properties but it also has used its resources during the past
year to participate in new transactions with its affiliates including a 15%
interest in fifteen health club properties and interests in properties in
France. Management believes that CPA(R):12 remains a strong portfolio and
continues to benefit from a strategy of diversification.
Results of Operations
Year Ended December 31, 2003 compared to Year Ended December 31, 2002
Net income for the year ended December 31, 2003 was $21,501,000 and the results
of the operations reflected increases in net income and income from continuing
operations of $4,850,000 and $5,871,000, respectively, as compared with the year
ended December 31, 2002. Results for the year ended December 31, 2003, included
gains of $2,366,000 (of which $620,000 are unrealized), a noncash impairment
charge of $1,000,000 and other income from lease terminations of $3,042,000.
Results for the year ended December 31, 2002 included a charge on the early
extinguishment of debt of $2,245,000 and unrealized losses of $447,000. The
results for the comparable periods reflected increases in income from equity
investments and interest income which were offset by a decrease in lease
revenues (rental income and interest income from direct financing leases) and
increases in interest and property expenses. There was no significant change in
general and administrative expenses for the comparable periods.
The increase in equity income was due to purchasing minority interests in net
lease transactions, with the remaining interests owned by affiliates, between
December 2002 and March 2003. The new investments own properties leased to
TruServ Corporation, Starmark Camhood LLC, Carrefour France, S.A. and
Medica-France. An existing equity investment in a distribution facility in Grand
Rapids, Michigan had been leased to The Fleming Companies until the lease was
terminated in March 2003 pursuant to Fleming's bankruptcy proceedings. A new
lease for the Grand Rapids property was entered into in December 2003 with The
Retail Distribution Group, Inc., effective January 1, 2004. The lease has an
initial term through August 2009. Income from equity investments in 2002
included a charge on the early extinguishment of debt of $961,000.
In August 2002, CPA(R):12 and three affiliates purchased a subordinated interest
in a mortgage securitization. Interest income from holding the investment for
the full fiscal year was $1,080,000 as compared with $371,000 in 2002. Interest
income from uninvested cash balances decreased by $330,000 due to lower average
cash balances in 2003 as compared with 2002.
The decrease in lease revenues was due in part to the reclassification in 2002
of properties leased to ShopRite Supermarkets, Inc. to equity investments;
however, the reclassification has no effect on income for the comparable years.
The remaining decrease was primarily due to the termination of several
short-term tenants at CPA(R):12's multi-tenant property in Newark, Delaware, the
termination of the lease with The Scott Companies, Inc. and lower rents from the
former Rheometric Scientific, Inc. property in Piscataway, New Jersey. Revenues
from the Newark property decreased by $562,000 and the property is substantially
vacant. Scott entered into liquidation in the fourth quarter; annual rentals
from Scott were $2,223,000. Rents from the former Rheometric property decreased
by approximately $110,000 after a lease termination agreement was completed in
January 2003. CPA(R):12 received substantial consideration in connection for the
termination and the successors to Rheometric leased a portion of the
3
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
building until January 2004. There are currently several short-term tenants at
the property and CPA(R):12 has engaged a nationally recognized real estate
brokerage company to remarket the property.
Interest expense increased solely as a result of the $46,335,000 of limited
recourse financing obtained in August 2002 in connection with the mortgage
securitization. Most of the cash that was received in connection with the
financings has been redeployed in new real estate investments.
The increase in property expenses was primarily due to an increase in asset
management fees from the increase in CPA(R):12's asset base because of the
purchase of interests in the TruServ, Starmark, Carrefour and Medica investments
and carrying costs at the Piscataway property which were $761,000.
CPA(R):12 faces several challenges including re-leasing the Newark, Piscataway
and former Scott properties. Management is evaluating the potential of selling
the Scott property as Management believes the property's best use may be
redevelopment for single-family homes. CPA(R):12's lease with International
Management Consulting, Inc. was terminated in October 2003 because the lessee
was unsuccessful in its attempt to restructure. CPA(R):12 has entered into an
agreement to sell the property and has reclassified the results from the
property as a discontinued operation. Other than the short-term leases in
Piscataway and Newark, no leases expire until 2009. CPA(R):12's lease with
Wal-Mart Stores, Inc. for a distribution facility in Greenfield, Indiana which
had an initial term through January 2005 has been extended for five years and
annual rent increased by $110,000 in consideration for funding improvements of
approximately $700,000. Garden Ridge Corporation, the lessee of a retail
property in Tulsa, Oklahoma has filed a petition of bankruptcy and is in the
process of reorganization. Garden Ridge may terminate its lease as part of its
plan of reorganization. Annual rent from Garden Ridge is $940,000.
Because of the long-term nature of CPA(R):12's net leases, inflation and
changing prices have not unfavorably affected CPA(R):12's revenues and net
income. CPA(R):12's net leases generally have rent increases based on formulas
indexed to increases in the CPI or other indices for the jurisdiction in which
the property is located, sales overrides or other periodic increases which are
designed to increase lease revenues in the future. More than 23 leases have rent
increases scheduled in 2003 and 2004. The majority of these rent increases are
CPI- based. The CPI has increased within a range of 1.5% and 3% over the past
several years. Intervals between rent increases range between one and five
years.
Year Ended December 31, 2002 compared to Year Ended December 31, 2001
Net income for the year ended December 31, 2002 decreased by $11,298,000 to
$16,650,000 as compared with net income of $27,948,000 for the year ended
December 31, 2001. The decrease in net income was attributable to a realized
gain of $8,864,000 in 2001 on the sale of a property, charges on early
extinguishment of debt in 2002 of $2,245,000 and, to a lesser extent, a
$1,570,000 effect for the change in the fair value of common stock warrants,
which unrealized gain or loss during the year is included in the determination
of net income. In 2002, CPA(R):12 recorded an unrealized loss of $447,000 from
warrants as compared with an unrealized gain of $1,124,000 in 2001. Excluding
the effect of these items, income would have reflected an increase of
$1,382,000. The increase in income, as adjusted, was due primarily to increases
in income from equity investments, interest and other income and lease revenues,
and a decrease in general and administrative expenses. These were partially
offset by increases in interest expense and property expense.
Income from equity investments increased primarily as a result of the
acquisition of properties in June 2001 leased to Special Devices, Inc. and the
re-leasing of the property in Grand Rapids to Fleming in August 2001 that had
been vacant. In addition, equity income benefited from rent increases from four
leases held by equity investees. Excluding the effect of a $961,000 charge on
extinguishment of debt, equity income increased $1,895,000 of which, $298,000
was due to CPA(R):12's share of earnings from the Special Devices properties,
$385,000 was contributed by the new lease in Grand Rapids and approximately
$447,000 was due to rent increases. A portion of the increase in income from
equity investments was due to the reclassification of investments to the equity
method in connection with contributing interests into limited partnerships owned
with affiliates. In connection with changes in the form of ownership of
jointly-held investments, interests in properties net leased to the Del Monte
Corporation and ShopRite Supermarkets, Inc. (formerly Big V Holding Corp.) were
reclassified to equity investments in the fourth quarter of 2001 and the third
quarter of 2002, respectively. Prior to the reclassification, CPA(R):12's
results of operations reflect the proportionate share of revenues and expenses.
Subsequent to reclassification, CPA(R):12's share of income from Del Monte and
ShopRite is recorded as equity income. The reclassification has no effect on the
overall contribution to cash flows or net income. For the year ended December
31, 2002, the Del Monte and ShopRite interests contributed $898,000 of equity
income.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Lease revenues increased by $131,000, less than 1%. However, lease revenues
decreased as the result of the reclassification of the Del Monte and ShopRite
investments to the equity method. Lease revenues reflected $631,000 and
$2,040,000 from Del Monte and ShopRite in 2002 and 2001, respectively, for the
periods prior to the reclassification. As adjusted, lease revenues for the year
ended December 31, 2002 increased by $1,540,000, or 4%, primarily as result of
the acquisition of properties leased to Orbseal LLC and Jen-Coat, Inc. in the
third quarter of 2001 and to a lesser extent, scheduled rent increases on
existing leases. These increases were partially offset by a reduction of
$794,000 from the BAE Systems, Inc. property, which was sold in May 2001. Funds
from the BAE property sale were used to acquire the Orbseal and Jen-Coat
properties as well as the equity interest in the Special Devices properties. In
2002, CPA(R):12 negotiated lease modifications with Randall International, Inc.
and International Management Consulting, Inc. Both the Randall and IMCI lease
amendments provided for short-term deferral of rent and establish a schedule to
systematically pay off the deferrals.
Interest expense for the year ended December 31, 2002 increased by $728,000,
primarily from new mortgage loans in 2002 and 2001. Interest expense in 2001
included approximately $160,000 of interest from an advance on CPA(R):12's
credit facility as well as $715,000 of interest from loans on the Del Monte and
ShopRite properties which are now reflected in equity income. Interest expense
on previously unencumbered properties included in a mortgage securitization was
approximately $852,000 from August 2002, when the new financing was obtained. As
a result of obtaining $46,335,000 of new mortgage debt in connection with the
securitization, annual interest expense is projected to increase by $2,706,000
and annual debt service will increase by $3,164,000.
General and administrative expense in 2001 included a charge for writing off
business development costs of $382,000 which had previously been capitalized in
connection with proposed acquisitions. The capitalized costs were written off
when proposed acquisitions were not completed. Excluding this writeoff, general
and administrative expenses reflected a moderate increase. Property expense
increased due to an increase in CPA(R):12's provision for uncollected rents.
Management's evaluation of specific circumstances indicated the need to
strengthen existing allowance balances.
The increase in interest and other income is the result of interest earned in
CPA(R):12's subordinated interest in the mortgage pool and higher average cash
balances. Management estimates that the effective rate of interest on the
mortgage obtained through the securitization, net of the estimated cash flow
from the interest in the mortgage trust, will be approximately 6.25%.
CPA(R):12' incurred extraordinary charges on the early extinguishment of debt of
$2,245,000, including $1,473,000 in connection with paying off certain loans
which were refinanced in connection with the mortgage securitization.
Financial Condition
The liquidity and financial condition of CPA(R):12 is stable and it has
sufficient cash balances and cash flow from its operations (including equity
investments) to maintain a prudent level of cash reserves and meet its
investment objectives. Since December 31, 2002, CPA(R):12's cash balances have
decreased by $26,779,000 to $13,305,000. The decrease was expected as funds were
used to participate in several investments with affiliates. CPA(R):12 believes
that its liquidity is strong and did not seek a renewal of a $20,000,000 credit
facility which expired in 2003.
One of CPA(R):12's primary objectives is to use the cash flow from its net
leases (including its equity investments) to fund an increasing rate of
dividends to shareholders and meet debt service requirements. Cash flow from
operations of $28,979,000, and cash flow from equity investments, which combined
totaled $31,223,000, and cash reserves of $709,000, was used to pay dividends of
$24,960,000, distributions of $1,443,000 to minority interest partners and
mortgage principal installments of $5,529,000. The ability to generate cash flow
to meet these uses will depend, in part, on whether the Newark, Piscataway and
Scott property in San Leandro, California will provide cash flow in the near
future, and if Garden Ridge affirms its lease. If CPA(R):12 is not successful in
generating cash flow and cash balances decrease, sustaining the distribution
rate to shareholders may be at risk.
CPA(R):12's investing activities included using $23,887,000 to purchase a 15%
interest in the Starmark net lease and a 35% interest in the Medica and
Carrefour properties. In connection with the purchase of an additional Carrefour
property in November 2003, CPA(R):12 and CPA(R):15 sold a portion of their
interests to W. P. Carey that reduced CPA(R):12's overall interest in the
Carrefour properties from 35% to 27.125%. CPA(R):12 received $1,972,000 for the
sale of a portion of the interest in the Carrefour properties as a result of an
increase in the appraised value of the properties, and, to a lesser extent,
appreciation of the Euro. The independent directors determined that it was
prudent to CPA(R):12's diversification to not further increase CPA(R):12's
overall exposure to Carrefour. CPA(R):12
5
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
also received $3,738,000 from a mortgage refinancing of an equity investee and
used $1,275,000 to pay deferred acquisition fees. With the purchase of the
Carrefour and Medica interests, CPA(R):12 is now exposed to the effects of
foreign currency fluctuations. CPA(R):12 and its affiliates mitigate the risk by
obtaining mortgage financing in the local currency so any changes in revenues
that result from foreign currency fluctuations are substantially offset by debt
service in the same currency.
In addition to the payment of dividends to shareholders, distributions to
minority partners and scheduled principal payments on mortgage debt, CPA(R):12's
financing activities included purchasing treasury stock for $2,282,000, issuing
comon stock for $997,000 and using $5,199,000 to pay off the Telos loan. A
$20,000,000 credit agreement which required CPA(R):12 to meet certain financial
covenants, including restrictions on indebtedness and meeting or exceeding
certain operating and coverage ratios was not renewed as CPA(R):12 had only used
it for limited purposes.
In 2002, CPA(R):12 purchased a participation in a mortgage pool consisting of
$172,335,000 of newly-issued mortgage debt collateralized by properties and
lease assignments on properties owned by CPA(R):12 and three affiliates.
CPA(R):12 and the affiliates also purchased subordinated interests of
$24,129,000 of which CPA(R):12 owns a 30% interest. The subordinated interests
are payable only after all other classes of ownership receive their stated
interest and related principal payments. The subordinated interests, therefore,
will be affected by any defaults or nonpayment by lessees. As of December 31,
2003, there have been no defaults. Three Garden Ridge properties are included in
the mortgage pool and in the event the leases are terminated, cash flow from
this investment might be adversely affected.
CPA(R):12 has used the capital that it has raised from its public offerings
along with limited recourse mortgage financing as its primary source of
liquidity. A lender of limited recourse mortgage debt has recourse only to the
property and lease assignments collateralizing such debt and not to any of
CPA(R):12's other assets, while unsecured financing provides a lender recourse
to all of CPA(R):12's assets. The use of limited recourse mortgage debt,
therefore, allows CPA(R):12 to limit the exposure of all of its assets to any
one debt obligation. CPA(R):12's loans generally have terms of at least ten
years, and no outstanding loans mature until 2005. In most instances, CPA(R):12
will seek to refinance maturing or recently paid-off mortgage debt with new
property-level financing. Substantially all of CPA(R):12's mortgage debt
provides for a fixed rate of interest and there is no assurance that existing
debt will be refinanced at lower rates of interest as such debt matures.
Mortgage lenders have provisions in many of the loans which restrict CPA(R):12's
ability to prepay a loan or provide for payment of premiums if paid prior to its
scheduled maturity.
Off-Balance Sheet and Aggregate Contractual Agreements
A summary of CPA(R):12's obligations under contractual arrangements as of
December 31, 2003 is as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Limited recourse mortgage notes payable $184,206 $ 5,953 $10,447 $11,539 $24,546 $ 22,553 $109,168
Deferred acquisition fees 6,658 1,467 1,420 1,223 828 576 1,144
Subordinated disposition fees 1,376 1,376
Share of minimum rents payable under
office cost-sharing agreement 429 156 156 117 -- -- --
-------- ------- ------- ------- ------- -------- --------
$192,669 $ 7,576 $12,023 $12,879 $25,374 $ 23,129 $111,688
======== ======= ======= ======= ======= ======== ========
In connection with the purchase of its properties, CPA(R):12 requires the
sellers to perform environmental reviews. Management believes, based on the
results of such reviews, that CPA(R):12's properties were in substantial
compliance with Federal and state environmental statutes at the time the
properties were acquired. However, portions of certain properties have been
subject to some degree of contamination, principally in connection with either
leakage from underground storage tanks, surface spills from facility activities
or historical on-site activities. In most instances where contamination has been
identified, tenants are actively engaged in the remediation process and
addressing identified conditions. Tenants are generally subject to environmental
statutes and regulations regarding the discharge of hazardous materials and any
related remediation obligations. In addition, CPA(R):12's leases generally
require tenants to indemnify CPA(R):12 from all liabilities and losses related
to the leased properties with provisions of such indemnification specifically
addressing environmental matters. The leases generally include provisions which
allow for periodic environmental assessments, paid for by the tenant, and allow
CPA(R):12 to extend
6
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
leases until such time as a tenant has satisfied its environmental obligations.
Certain of the leases allow CPA(R):12 to require financial assurances from
tenants such as performance bonds or letters of credit if the costs of
remediating environmental conditions are, in the estimation of CPA(R):12, in
excess of specified amounts. Accordingly, Management believes that the ultimate
resolution of any environmental matter will not have a material adverse effect
on CPA(R):12's financial condition, liquidity or results of operations.
Critical Accounting Estimates
CPA(R):12 makes certain judgments and uses certain estimates and assumptions
when applying accounting principles generally accepted in the United States of
America in the preparation of its consolidated financial statements that affect
the reported amount of assets, liabilities, revenues and expenses. CPA(R):12
believes its most critical accounting estimates relate to its provision for
uncollected amounts from lessees, potential impairment of assets, identification
of discontinued operations, classification of real estate assets, determining
the fair value of assets and liabilities which are "marked to market" but not
actively traded in a public market and determining the interest to be
capitalized in connection with real estate under construction. CPA(R):12's
significant accounting policies are described in the notes to the financial
statements. Certain policies, while significant, may not require the use of
estimates.
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 the collectibility of these
receivables based on the facts and circumstances of each situation rather than
solely use statistical methods. CPA(R):12 generally 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 will
measure its allowance against actual rent arrearages and adjust the percentage
applied. For amounts in arrears, Management makes subjective judgments based on
its knowledge of a lessee's circumstances and may reserve for the entire
receivable amount from a lessee because there has been significant or continuing
deterioration in the lessee's ability to meet its lease obligations. Under net
leases, lessees are obligated to pay real estate taxes on behalf of CPA(R):12;
however, when a lessee is in bankruptcy, CPA(R):12 may pay the tax obligation in
order to preserve its interest in the property. If such a payment relates to a
pre-petition period, CPA(R):12 may record such payment as an expense rather than
as a receivable when it assumes the chance of reimbursement by the lessee is
unlikely. Based on its actual experience in 2003, CPA(R):12 recorded a provision
equal to approximately 1.5% of lease revenues.
Operating real estate is stated at cost less accumulated depreciation. Costs
directly related to build-to-suit projects, primarily interest, if applicable,
are capitalized. No interest was capitalized in 2003, 2002 and 2001. CPA(R):12
considers a build-to-suit project as substantially completed upon the completion
of improvements, but no later than a date that is negotiated and stated in the
lease. If portions of a project are substantially completed and occupied and
other portions have not yet reached that stage, the substantially completed
portions are accounted for separately. CPA(R):12 allocates costs incurred
between the portions under construction and the portions substantially completed
and only capitalizes those costs associated with the portion under construction.
CPA(R):12 does not have a credit facility and determines an interest rate to be
applied for capitalizing interest based on an average rate on its outstanding
limited recourse mortgage debt.
CPA(R):12 classifies its directly-owned leased assets for financial reporting
purposes as either real estate leased under the operating method or net
investment in direct financing leases at the inception of a lease 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 contractual terms of CPA(R):12's
leases are not necessarily different for operating and direct financing leases;
however the classification is based on accounting pronouncements which are
intended to indicate whether the risks and rewards of ownership are retained by
the lessor or transferred to the lessee. Management believes that it retains
certain risks of ownership regardless of accounting classification. Assets
classified as direct financing leases are not depreciated and, therefore, the
classification of assets, may have a significant impact on net income even
though it has no effect on cash flows.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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 a property accounted for under the operating method may not
be recoverable, Management must first determine if the property will be held for
use or held for sale. Management then performs projections of 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 generally 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. Because
CPA(R):12's properties are leased to single tenants, CPA(R):12 is more likely to
incur significant writedowns when circumstances affecting a tenant deteriorate
because of the possibility that a property will be vacated in its entirety. The
risk of vacancy for single tenant properties is different from 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 direct financing leases, CPA(R):12 performs a review of its estimated
residual value of properties at least annually to determine whether there has
been an other than temporary decline in CPA(R):12's current estimate of residual
value of the underlying real estate assets of direct financing leases. 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. While an evaluation of potential impairment of real estate accounted
for under the operating method is determined by a change in circumstances, the
evaluation of a direct financing lease can be affected by changes in long-term
market conditions even though the obligations of the lessee are being met.
Changes in circumstances include, but are not limited to, vacancy of a property
not subject to a lease and termination of a lease. CPA(R):12 may also assess
properties for impairment because it expects a lease not to be renewed and the
lease is within one year of its expiration, a lessee is experiencing financial
difficulty and Management expects that there is a reasonable probability that
the lease will be terminated in a bankruptcy organization or a property remains
vacant for a period that exceeds the period anticipated in a prior impairment
evaluation.
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. To the extent that a purchase and sale agreement has
been entered into, the allowance is based on the negotiated sales price. To the
extent that CPA(R):12 has adopted a plan to sell an asset but has not entered
into a sales agreement, it will make judgments of the net sales price based on
current market information. Accordingly, the initial assessment may be greater
or less than the purchase price subsequently committed to and may result in a
further adjustment to the fair value of the property. If circumstances arise
that previously were considered unlikely and, as a result, the Company 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) its carrying amount before the
property 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 date 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 measures derivative instruments, including
certain 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 right
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 (i.e., the
forecasted event occurs). For derivatives designated as cash flow hedges, the
effective portions of the derivatives are reported in other comprehensive income
and are subsequently reclassified into earnings when the hedged item affects
earnings.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Changes in the fair value of derivative instruments not designated as hedging
and ineffective portions of hedges are recognized in earnings in the affected
period. To determine the value of warrants for common stock which are classified
as derivatives, various estimates are included in the options pricing model used
to determine the value of a warrant.
In connection with the acquisition of properties, purchase costs will be
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values. The value of the tangible assets, consisting of
land, buildings and tenant improvements, will be determined as if vacant.
Intangible assets including the above-market or below-market value of leases,
the value of in-place leases and the value of tenant relationships will be
recorded at their relative fair values.
The value attributed to tangible assets will be determined in part using a
discount cash flow model which is intended to approximate what a third party
would pay to purchase the property as vacant and rent at "market" rates. In
applying the model CPA(R):12 assumes that the disinterested party would sell the
property at the end of a market lease term. Assumptions used in the model are
property-specific as it is available; however, when certain necessary
information isn't available, CPA(R):12 will use available regional and
property-type information. Assumptions and estimates include a discount rate or
internal rate of return, marketing period necessary to put a lease in place,
carrying costs during the marketing period, leasing commissions and tenant
improvements allowances, market rents and growth factors of such rents, market
lease term and a cap rate to be applied to an estimate of market rent at the end
of the market lease term.
Above-market and below-market lease intangibles will be based on the difference
between the market rent and the contractual rents and will be discounted to a
present value using an interest rate reflecting CPA(R):12`s assessment of the
risk associated with the lease acquired. CPA(R):12 acquires properties subject
to net leases and considers the credit of the lessee in negotiating the initial
rent.
The total amount of other intangible assets will be allocated to in-place lease
values and tenant relationship intangible values based on our evaluation of the
specific characteristics of each tenant's lease and our overall relationship
with each tenant. Characteristics considered in allocating these values include
the nature and extent of the existing relationship with the tenant, prospects
for developing new business with the tenant, the tenant's credit quality and the
expectation of lease renewals among other factors. The aggregate value of other
intangible assets acquired will be measured based on the difference between (i)
the property valued with an in-place lease adjusted to market rental rates and
(ii) the property valued as if vacant. Independent appraisals or our estimates
will be used to determine these values.
Factors considered include the estimated carrying costs of the property during a
hypothetical expected lease-up period, current market conditions and costs to
execute similar leases. Estimated carrying costs will include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods, based on
assessments of specific market conditions. Estimated costs to execute leases
include commissions and legal costs to the extent that such costs are not
already incurred with a new lease that has been negotiated in connection with
the purchase of the property.
Accounting Pronouncements
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,
9
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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 for valuing stock-based compensation 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"). In December 2003, the FASB issued a revised FIN 46
which modifies and clarifies various aspects of the original Interpretation. FIN
46 applies when either (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest, (2) the equity
investment at risk is insufficient to finance that entity's activities without
additional subordinated financial support or (3) the equity investors have
voting rights that are not proportionate to their economic interest. In addition
FIN 46 requires additional disclosures.
FIN 46 is effective immediately for VIEs created after January 31, 2003, and to
VIEs in which an enterprise obtains an interest after that date. For variable
interests in a VIE created or obtained prior to February 1, 2003, FIN 46 is
effective for periods ending after March 15, 2004.
CPA(R):12 has evaluated the potential impact 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. CPA(R):12's
maximum loss exposure is the carrying value of its equity investments.
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 adoption of SFAS No.
149 did not have a material effect on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). In particular, it requires
that mandatorily redeemable financial instruments be classified as liabilities
and reported at fair value and that changes in their fair values be reported as
interest cost.
This statement was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for CPA(R):12 as of July 1, 2003.
On November 7, 2003, the FASB indefinitely deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatorily
redeemable non-controlling interests. This deferral is expected to remain in
effect while these provisions are further evaluated by the FASB. Based on the
FASB's deferral of this provision, the adoption of SFAS No. 150 did not have a
material effect on CPA(R):12's financial statements.
10
REPORT of INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Corporate Property Associates 12 Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Corporate Property
Associates 12 Incorporated and its subsidiaries at December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of W. P. Carey & Co. LLC (the "Advisor"); our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the Advisor, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 10, 2004
11
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
2003 2002
---- ----
ASSETS:
Real estate leased to others:
Accounted for under the operating method:
Land $ 51,504,515 $ 52,710,371
Buildings 292,724,690 297,713,891
------------- -------------
344,229,205 350,424,262
Less, accumulated depreciation 41,176,156 34,815,471
------------- -------------
303,053,049 315,608,791
Net investment in direct financing leases 19,127,500 24,987,051
Assets held for sale 10,453,403 --
Equity investments 90,206,460 70,551,264
Cash and cash equivalents 13,305,343 40,084,470
Marketable securities 8,810,482 7,510,030
Other assets, net of allowance for uncollected rents of $1,711,511
and $1,066,396 in 2003 and 2002 and accumulated amortization of
$1,206,498 and $790,420 in 2003 and 2002 17,234,625 13,386,909
------------- -------------
Total assets $ 462,190,862 $ 472,128,515
============= =============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 180,981,200 $ 191,662,114
Limited recourse mortgage notes payable on assets held for sale 3,224,335 3,271,697
Accrued interest 1,035,859 1,098,917
Accounts payable and accrued expenses 2,473,641 2,170,744
Due to affiliates 3,062,758 2,843,060
Deferred acquisition fees payable to affiliate 6,658,067 6,255,973
Dividends payable 6,271,709 6,223,080
Prepaid rental income and security deposits 5,131,254 5,059,112
------------- -------------
Total liabilities 208,838,823 218,584,697
------------- -------------
Minority interest 8,021,816 7,937,305
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares; issued
and outstanding, 31,284,287 and 30,878,338 shares at
December 31, 2003 and 2002 31,284 30,878
Additional paid-in capital 282,962,414 278,735,372
Dividends in excess of accumulated earnings (29,949,878) (26,441,642)
Accumulated other comprehensive income 1,594,782 307,999
------------- -------------
254,638,602 252,632,607
Less, treasury stock at cost, 975,975 and 747,252 shares at
December 31, 2003 and 2002 (9,308,379) (7,026,094)
------------- -------------
Total shareholders' equity 245,330,223 245,606,513
------------- -------------
Total liabilities and shareholders' equity $ 462,190,862 $ 472,128,515
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENTS of INCOME
For the year ended December 31,
-------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Rental income $ 40,421,838 $ 39,879,335 $ 38,699,610
Interest income from direct financing leases 2,585,832 4,149,082 5,197,590
Interest and other income 4,724,262 1,266,968 804,542
------------ ------------ ------------
47,731,932 45,295,385 44,701,742
------------ ------------ ------------
Expenses:
Interest expense 14,873,028 14,042,261 13,314,629
Depreciation 7,447,713 7,251,220 7,198,707
General and administrative 4,047,682 4,025,716 4,254,153
Property expense 9,147,193 7,128,517 6,688,170
Impairment charge on real estate 1,000,000 -- --
Charge on early extinguishment of debt -- 1,284,509 --
------------ ------------ ------------
36,515,616 33,732,223 31,455,659
------------ ------------ ------------
Income from continuing operations before minority
interest, income from equity investments and
gain (loss) 11,216,316 11,563,162 13,246,083
Minority interest in income (1,527,601) (1,473,948) (1,393,297)
Income from equity investments, including charge on early
extinguishment of debt of $960,602 in 2002 9,424,757 5,966,615 5,032,221
------------ ------------ ------------
Income from continuing operations before gains
(losses) 19,113,472 16,055,829 16,885,007
Realized gain on foreign currency 76,448 -- --
Unrealized gain (loss) on foreign currency transactions and
warrants 619,701 (446,541) 1,123,500
Gain on sale of interest in equity investment 1,432,858 -- --
Gain on settlement of derivatives contract 237,340 -- --
------------ ------------ ------------
Income from continuing operations before gains on
sale of real estate 21,479,819 15,609,288 18,008,507
Discontinued operations:
Income from operations of discontinued properties 20,766 1,041,130 1,075,515
------------ ------------ ------------
Income from discontinued operations 20,766 1,041,130 1,075,515
------------ ------------ ------------
Gain on sale of real estate -- -- 8,863,709
------------ ------------ ------------
Net income $ 21,500,585 $ 16,650,418 $ 27,947,731
============ ============ ============
Basic and diluted income per common share:
Earnings from continuing operations $ .71 $ .52 $ .90
Earnings from discontinuing operations -- .03 .04
------------ ------------ ------------
Net Income $ .71 $ .55 $ .94
============ ============ ============
Weighted average shares outstanding-basic and diluted 30,234,073 30,038,268 29,763,716
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENT of SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2002, and 2003
Dividends in
Additional Excess Accumulated
Common Paid-in Comprehensive of Accumulated Other Comprehen- Treasury
Stock Capital Income Earnings sive Income Stock Total
Balance at
January 1, 2001 $29,169 $261,821,096 $(21,791,937) -- $(4,965,367) $235,092,961
1,313,015 shares issued,
net of costs 1,313 12,907,341 12,908,654
Dividends declared (24,481,101) (24,481,101)
Comprehensive income:
Net income $27,947,731 27,947,731 27,947,731
===========
Repurchase of 55,503
shares (544,573) (544,573)
------- ------------ ------------ ---------- ----------- ------------
Balance at
December 31, 2001 30,482 274,728,437 (18,325,307) -- (5,509,940) 250,923,672
396,008 shares issued,
net of costs 396 4,006,935 4,007,331
Dividends declared (24,766,753) (24,766,753)
Comprehensive income:
Net income $16,650,418 16,650,418 16,650,418
Change in unrealized
gain on marketable
securities 307,999 307,999 307,999
-----------
$16,958,417
===========
Repurchase of 154,322
shares (1,516,154) (1,516,154)
------- ------------ ------------ ---------- ----------- ------------
Balance at
December 31, 2002 30,878 278,735,372 (26,441,642) 307,999 (7,026,094) 245,606,513
405,949 shares issued,
net of costs 406 4,227,042 4,227,448
Dividends declared (25,008,821) (25,008,821)
Comprehensive income:
Net income $21,500,585 21,500,585 21,500,585
Other comprehensive
income:
Change in unrealized
gain on marketable
securities 824,684 824,684 824,684
Foreign currency
translation adjustment 462,099 462,099 462,099
-----------
$22,787,368
===========
Repurchase of 228,723
shares (2,282,285) (2,282,285)
------- ------------ ------------ ---------- ----------- ------------
Balance at
December 31, 2003 $31,284 $282,962,414 $(29,949,878) $1,594,782 $(9,308,379) $245,330,223
======= ============ ============ ========== =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
14
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS
For the year ended December 31,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 21,500,585 $ 16,650,418 $ 27,947,731
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations (20,766) (1,041,130) (1,075,515)
Depreciation and amortization 7,976,954 7,504,485 7,407,706
Straight-line rent adjustments (1,055,294) (1,402,501) (1,131,902)
Minority interest in income 1,527,601 1,473,948 1,393,297
Impairment charge on real estate 1,000,000 -- --
Lease termination proceeds assigned to lender (2,540,000) -- --
Reversal of unrealized gain on warrants on conversion to shares 237,340
Gain on settlement of derivatives contract (237,340) -- --
Gain on sale of interest in equity investment (1,432,858) -- --
Income from equity investments before charge on extinguishment
of debt in excess of distributions received (1,022,725) (628,807) (814,795)
Charge on extinguishment of debt -- 2,245,111 --
Gain on foreign currency transactions (76,448) -- --
Fees paid by issuance of stock 3,230,358 2,849,209 2,755,791
Gain on sales of real estate and securities -- -- (8,863,709)
Noncash settlement income (368,000) (371,294) --
Unrealized (gain) loss on foreign currency transactions and
warrants (619,701) 446,541 (1,123,500)
Prepayment premium on extinguishment of debt -- (1,225,092) --
Change in operating assets and liabilities, net 544,633 794,995 (1,233,694)
------------ ------------ ------------
Net cash provided by continuing operations 28,644,339 27,295,883 25,261,410
Net cash provided by discontinued operations 334,453 1,279,146 1,309,284
------------ ------------ ------------
Net cash provided by operating activities 28,978,792 28,575,029 26,570,694
------------ ------------ ------------
Cash flows from investing activities:
Distributions received in excess of equity income 2,244,029 1,424,304 2,522,721
Distribution of mortgage financing proceeds received from equity
investments 3,738,075 1,766,449 13,145,242
Proceeds from sales of real estate and securities 1,971,594 2,836,800 --
Payment of deferred acquisition fees (1,274,925) (1,375,711) (1,214,073)
Purchases of real estate and equity investments and other capitalized
costs (23,887,461) (13,830,912) (5,420,821)
Purchase of securities -- (10,075,422) --
------------ ------------ ------------
Net cash (used in) provided by investing activities (17,208,688) (19,254,492) 9,033,069
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid (24,960,192) (24,692,005) (24,204,541)
Payments of mortgage principal (5,528,874) (4,981,330) (4,415,958)
Prepayment of mortgages payable (5,199,402) (8,908,195) (8,786,509)
Payment of note payable -- -- (4,300,000)
Advances on line of credit -- 10,000,000 --
Repayments of advanced on credit facility -- (10,000,000) --
Proceeds from issuance of mortgages (a) -- 44,776,210 23,510,836
Payment of financing costs and mortgage deposits (132,478) (775,966) (983,436)
Costs of raising capital -- -- (276,030)
Proceeds from issuance of shares, net of costs 997,090 1,158,122 10,428,893
Capital distributions to minority partner -- -- (15,003,000)
Distributions to minority partners (1,443,090) (1,444,080) (1,555,435)
Purchase of treasury stock (2,282,285) (1,516,154) (544,573)
------------ ------------ ------------
Net cash (used in) provided by financing activities (38,549,231) 3,616,602 (26,129,753)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (26,779,127) 12,937,139 9,474,010
Cash and cash equivalents, beginning of year 40,084,470 27,147,331 17,673,321
------------ ------------ ------------
Cash and cash equivalents, end of year $ 13,305,343 $ 40,084,470 $ 27,147,331
============ ============ ============
- continued -
15
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Noncash investing and financing activities:
During 2001, proceeds from the sale of a property of $30,492,012 were
placed in an escrow account and were subsequently released in connection
with the purchase of additional real estate.
a. Net of $1,559,055 held back from proceeds of mortgages by a mortgage
lender to fund certain escrow accounts in 2002.
Included in the cost basis of real estate investments acquired in 2003, 2002,
and 2001 are deferred acquisition fees payable of $1,677,019, $413,096
and $942,283, respectively.
In connection with contributing tenancy-in-common interests to jointly-owned
entities in 2002 and 2001, assets and liabilities were reclassified as an equity
investment as follows:
2002 2001
---- ----
Real estate assets $ 8,814,224 $9,232,911
Mortgage note payable (3,029,875) --
Other assets and liabilities, net 340,014 --
----------- ----------
Equity investment $ 6,124,363 $9,232,911
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
16
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of
Corporate Property Associates 12 Incorporated, its wholly-owned
subsidiaries and a controlling interest in a majority-owned limited
liability company (collectively, the "Company"). The Company is not
a primary beneficiary of any variable interest entity ("VIE"). All
material inter-entity transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates relate to the
assessment of the recoverability of real estate assets and
investments, classification of real estate leased to others,
identification of any intangible assets in connection with asset
acquisitions and allowance for uncollected amounts. Actual results
could differ from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the
tenant is generally responsible for all operating expenses relating
to the property, including property taxes, insurance, maintenance,
repairs, renewals and improvements. For the year ended December 31
2003, lessees were responsible for the direct payment of real estate
taxes of approximately $5,016,000. Expenditures for maintenance and
repairs including routine betterments are charged to operations as
incurred. Significant renovations which increase the useful life of
the properties are capitalized.
The Company diversifies its real estate investments among various
corporate tenants engaged in different industries, by property type
and geographically.
The leases are accounted for under either the direct financing or
operating methods. Such methods are described below.
Direct financing method - Leases accounted for under the
direct financing method are recorded at their net investment
(Note 4). Unearned income is deferred and amortized to income
over the lease terms so as to produce a constant periodic rate
of return on the Company's net investment in the lease.
Operating method - Real estate is recorded at cost less
accumulated depreciation, minimum rental revenue is recognized
on a straight-line basis over the term of the leases, and
expenses (including depreciation) are charged to operations as
incurred.
When events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable, the Company
assesses the recoverability of its long-lived assets, including
residual interests of real estate assets and investments, based on
projections of undiscounted cash flows, without interest charges,
over the life of such assets. In the event that such cash flows are
insufficient, the assets are adjusted to their estimated fair value.
Residual values of the net investment in direct financing leases are
reviewed at least annually. If a decline in the estimated residual
value is other than temporary, the accounting for the direct
financing lease will be revised using the changed estimate. The
resulting reduction in the net investment in the direct financing
lease is recognized as a loss in the period in which the estimate is
changed.
In connection with the Company's acquisition of properties, purchase
costs are allocated to the tangible and intangible assets and
liabilities acquired based on their estimated fair values. The value
of the tangible assets, consisting of land, buildings and tenant
improvements, are determined as if vacant. Intangible assets
including the above-market or below-market value of leases, the
value of in-place leases and the value of tenant relationships are
recorded at their relative fair values.
17
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Above-market and below-market in-place lease values for owned
properties are recorded based on the present value (using an
interest rate reflecting the risks associated with the leases
acquired) of the difference between (i) the contractual amounts to
be paid pursuant to the leases negotiated and in-place at the time
of acquisition of the properties and (ii) management's estimate of
fair market lease rates for the property or equivalent property,
measured over a period equal to the remaining non-cancelable term of
the lease. The capitalized above-market lease value is amortized as
a reduction of rental income over the remaining non-cancelable term
of each lease. The capitalized below-market lease value is amortized
as an increase to rental income over the initial term and any fixed
rate renewal periods in the respective leases.
The total amount of other intangible assets are allocated to
in-place lease values and tenant relationship intangible values
based on management's evaluation of the specific characteristics of
each tenant's lease and the Company's overall relationship with each
tenant. Characteristics considered in allocating these values
include the nature and extent of the existing relationship with the
tenant, prospects for developing new business with the tenant, the
tenant's credit quality and the expectation of lease renewals among
other factors. The aggregate value of other intangible assets
acquired will be measured based on the difference between (i) the
property valued with an in-place lease adjusted to market rental
rates and (ii) the property valued as if vacant. Independent
appraisals or management's estimates are used to determine these
values.
Factors considered in the analysis include the estimated carrying
costs of the property during a hypothetical expected lease-up
period, current market conditions and costs to execute similar
leases. The Company also considers information obtained about a
property in connection with its pre-acquisition due diligence.
Estimated carrying costs include real estate taxes, insurance, other
property operating costs and estimates of lost rentals at market
rates during the hypothetical expected lease-up periods, based on
management's assessment of specific market conditions. Estimated
costs to execute leases including commissions and legal costs to the
extent that such costs are not already incurred with a new lease
that has been negotiated in connection with the purchase of the
property are also considered.
The value of in-place leases will be amortized to expense over the
remaining initial term of each lease. The value of tenant
relationship intangibles will be amortized to expense over the
initial and renewal terms of the leases but no amortization period
for intangible assets will exceed the remaining depreciable life of
the building.
For properties under construction, operating expenses including
interest charges are capitalized and rentals received are recorded
as a reduction of capitalized project (i.e., construction) costs.
Substantially all of the Company's leases provide for either
scheduled rent increases, periodic rent increases based on formulas
indexed to increases in the Consumer Price Index ("CPI") or sales
overrides. Rents from sales overrides (percentage of sales rents)
are recognized as reported by lessees, that is, after the level of
sales requiring a rental payment to the Company is reached.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of properties - generally 40 years.
Equity Investments:
The Company's interests in entities in which the entity is not
considered to be a VIE or the Company is not deemed to be the
primary beneficiary, and the Company's ownership is 50% or less and
has the ability to exercise significant influence and
jointly-controlled tenancy-in-common interests are accounted for
under the equity method, i.e. at cost, increased or decreased by the
Company's share of earnings or losses, less distributions.
Assets Held For Sale:
Assets held for sale are accounted for at the lower of carrying
value or fair value less costs to dispose. Assets are classified as
held for sale when the Company has committed to a plan to actively
market a property for sale and expects that a sale will be completed
within one year. The results of operations and the related gain or
loss on
18
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sale of properties classified as held for sale by the Company after
December 31, 2001, are included in discontinued operations.
If circumstances arise that previously were considered unlikely and,
as a result, the Company 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) its carrying amount before the
property 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, (b) the fair
value at the date of the subsequent decision not to sell, or (c) the
current carrying value.
The Company recognizes gains and losses on the sale of properties
when among other criteria, the parties are bound by the terms of the
contract, all consideration has been exchanged and all conditions
precedent to closing have been performed. At the time the sale is
consummated, a gain or loss is recognized as the difference between
the sale price less any closing costs and the carrying value of the
property.
Foreign Currency Translation:
The Company owns equity investments which invest in real estate in
France. The functional currency for the investment is the Euro. The
translation from the Euro to U.S. dollars is performed by the equity
investee for assets and liabilities using current exchange rates in
effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period.
The gains and losses resulting from such translation are reported as
a component of other comprehensive income as part of shareholders'
equity. The cumulative translation adjustment as of December 31,
2003 has a gain of $462,099. The Company had no foreign investments
prior to 2003.
Foreign currency transactions may produce receivables or payables
that are fixed in terms of the amount of foreign currency that will
be received or paid. A change in the exchange rates between the
functional currency and the currency in which a transaction is
denominated increases or decreases the expected amount of functional
currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows
is a foreign currency transaction gain or loss that generally will
be included in determining net income for the period in which the
exchange rate changes. Likewise, a transaction gain or loss
(measured from the transaction date or the most recent intervening
balance sheet date) whichever is later, realized upon settlement of
a foreign currency transaction generally will be included in net
income for the period in which the transaction is settled. Foreign
currency transactions that are (i) designated as, and are effective
as, economic hedges of a net investment and (ii) intercompany
foreign currency transactions that are of a long-term nature (that
is, settlement is not planned or anticipated in the foreseeable
future), when the entities to the transactions are consolidated or
accounted for by the equity method in the Company's financial
statements will not be included in determining net income but will
be accounted for in the same manner as foreign currency translation
adjustments and reported as a component of other comprehensive
income as part of shareholder's equity. The contributions to the
equity investments were funded in part through subordinated debt.
Foreign currency intercompany transactions that are scheduled for
settlement, consisting primarily of accrued interest and the
translation to the reporting currency of intercompany subordinated
debt with scheduled principal repayments, are included in the
determination of net income, and, for the year ended December 31,
2003, the Company recognized unrealized gains of $822,108 from such
transactions. In 2003, the Company recognized realized gains of
$76,448 on foreign currency transactions, in connection with the
transfer of cash from foreign operations of subsidiaries to the
parent company.
Cash and Cash Equivalents:
The Company considers all short-term, highly liquid investments that
are both readily convertible to cash and have a maturity of
generally three months or less at the time of purchase to be cash
equivalents. Items classified as cash equivalents include commercial
paper and money market funds. At December 31, 2003 and 2002, the
Company's cash and cash equivalents were held in the custody of two
financial institutions, and which balances at times exceed federally
insurable limits. The Company mitigates this risk by depositing
funds with major financial institutions.
19
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Marketable Securities:
Marketable securities which consist of an interest in collateralized
mortgage obligations (see Note 4) and common stock in
publicly-traded companies, are classified as available for sale
securities and reported at fair value with the Company's interest in
unrealized gains and losses on these securities reported as a
component of other comprehensive income (loss) until realized. Such
marketable securities had a cost basis of $7,677,799 and $7,202,031
and reflected a fair value of $8,810,482 and $7,510,030 at December
31, 2003 and 2002, respectively.
Other Assets:
Included in other assets are deferred charges and deferred rental
income. Deferred charges are costs incurred in connection with
mortgage financings and refinancings and are amortized over the
terms of the mortgages and included in interest expense in the
accompanying consolidated financial statements. Deferred rental
income is the aggregate difference for operating leases between
scheduled rents which vary during the lease term and rent recognized
on a straight-line basis.
Derivative Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities"
became effective in 2001 and established accounting and reporting
standards for derivative instruments. Certain stock warrants which
were granted to the Company by lessees in connection with
structuring the initial lease transactions are defined as derivative
instruments because such stock warrants are readily convertible to
cash or provide for net settlement upon conversion. Pursuant to SFAS
No. 133, changes in the fair value of such derivative instruments as
determined using an option pricing model are recognized currently in
earnings as gains or losses. Changes in fair value for the years
ended as of December 31, 2003, 2002 and 2001, were unrealized losses
of $202,407 and $446,541, respectively and in 2001, an unrealized
gain of $1,123,500. As of December 31, 2003, warrants issued to the
Company by Vermont Teddy Bear Co., Inc., Sentry Technology
Corporation ("Sentry") and Randall International, Inc. are
classified as derivative instruments. In January 2003, the Company
exercised all of its warrants in Rheometric Scientific, Inc.
("Rheometric") which subsequently became Proterion Corporation
("Proterion"). The Company also holds certain stock warrants which
are not defined as derivative instruments and have been recorded at
nominal values. The Company has only recognized unrealized gains or
losses on stock warrants that are derivative instruments.
Costs of Raising Capital:
Costs incurred in connection with the raising of capital through the
sale of common stock are charged to shareholders' equity upon the
issuance of shares.
Treasury Stock:
Treasury stock is recorded at cost.
Deferred Acquisition Fees:
Fees are payable for services provided by W.P. Carey & Co. LLC (the
"Advisor") to the Company relating to the identification,
evaluation, negotiation, financing and purchase of properties. A
portion of such fees are deferred and are payable in annual
installments with each installment equal to .25% of the purchase
price of the properties over no less than eight years following the
first anniversary of the date a property was purchased.
Earnings Per Share:
The Company has a simple equity capital structure with only common
stock outstanding. As a result, the Company has presented basic
per-share amounts only for all periods presented in the accompanying
consolidated financial statements.
20
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Federal Income Taxes:
The Company is qualified as a real estate investment trust ("REIT")
as of December 31, 2003 as defined under the Internal Revenue Code
of 1986. The Company is not subject to Federal income taxes on
amounts distributed to shareholders provided it distributes at least
90% of its REIT taxable income to its shareholders and meets certain
other conditions. The Company and subsidiaries are subject to state
and local and foreign taxes, which aggregate $102,033 in 2003 and
$162,855 in 2002, and are included in general and administrative
expenses.
Operating Segments:
Accounting standards have been established for the way public
business enterprises report selected information about operating
segments and guidelines for defining the operating segments of an
enterprise. Based on the standards' definition, the Company has
reported its real estate operations both domestically and
internationally (See Note 10).
Reclassification:
Certain prior year amounts have been reclassified to conform to the
current year's financial statement presentation.
Accounting Pronouncements:
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 for valuing stock-based compensation 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"). In December 2003,
the FASB issued a revised FIN 46 which modifies and clarifies
various aspects of the original Interpretation. FIN 46 applies when
either (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest, (2) the
equity investment at risk is insufficient to finance that entity's
activities without additional subordinated financial support or (3)
the equity investors have voting rights that are not proportionate
to their economic interest. In addition FIN 46 requires additional
disclosures.
FIN 46 is effective immediately for VIEs created after January 31,
2003, and to VIEs in which an enterprise obtains an interest after
that date. For variable interests in a VIE created or obtained prior
to February 1, 2003, FIN 46 is effective for periods ending after
March 15, 2004.
21
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has evaluated the potential impact 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. The Company's maximum loss exposure is the
carrying value of its equity investments.
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 adoption
of SFAS No. 149 did not have a material effect on the financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for the classification
and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). In particular, it
requires that mandatorily redeemable financial instruments be
classified as liabilities and reported at fair value and that
changes in their fair values be reported as interest cost.
This statement was effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective for the
Company as of July 1, 2003. On November 7, 2003, the FASB
indefinitely deferred the classification and measurement provisions
of SFAS No. 150 as they apply to certain mandatorily redeemable
non-controlling interests. This deferral is expected to remain in
effect while these provisions are further evaluated by the FASB.
Based on the FASB's deferral of this provision, the adoption of SFAS
No. 150 did not have a material effect on the Company's financial
statements.
2. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the
Advisory Agreement between the Company and the Advisor provides that the
Advisor receive asset management and performance fees, each of which are
1/2 of 1/% of Average Invested Assets as defined in the Advisory
Agreement. The performance fee is subordinated to the Preferred Return, a
cumulative non-compounded dividend return of 7%. The Advisor has elected
at its option to receive the performance fee in restricted shares of
common stock of the Company rather than cash. The Advisor is also
reimbursed for the actual cost of personnel needed to provide
administrative services necessary to the operation of the Company. The
Company incurred asset management fees of $3,378,780, 2,847,951, and
$2,782,154 in 2003, 2002, and 2001 respectively, with performance fees in
like amount. The Company incurred personnel reimbursements of $1,378,810,
$1,323,152, and $1,289,852, in 2003, 2002, and 2001, respectively.
Fees are payable to the Advisor for services provided to the Company
relating to the identification, evaluation, negotiation, financing and
purchase of properties and refinancing of mortgages. A portion of such
fees are deferred and payable in equal installments over no less than
eight years following the first anniversary of the date a property was
purchased. Such deferred fees are only payable if the Preferred Return has
been met. The unpaid portion of the deferred fees bears interest at an
annual rate of 7% from the date of acquisition of a property until paid.
For transaction and refinancings that were completed in 2003, 2002, and
2001, current fees were $807,467, $770,458, and $1,068,478, respectively,
and deferred fees were $645,974, $413,097 and $806,283, respectively. On
March 12, 2003, the Company purchased from Corporate Property Associates
15 Incorporated ("CPA(R):15"), an affiliate, a 35% interest in a company
that leases thirteen properties to two lessees. In connection with the
purchase, the Company assumed an obligation of the deferred acquisition
fee payable to the Advisor 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 (see Note 5).
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceeds the 2%/25% Guidelines (the
greater of 2% of Average Invested Assets or 25% of Net Income) as defined
in
22
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Advisory Agreement for any twelve-month period. If in any year the
operating expenses of the Company exceed the 2%/25% Guidelines, the
Advisor will have an obligation to reimburse the Company for such excess,
subject to certain conditions. Only if the Independent Directors find that
such excess expenses were justified based on any unusual and nonrecurring
factors which they deem sufficient, the Advisor may be paid in future
years for the full amount or any portion of such excess expenses, but only
to the extent that such reimbursement would not cause the Company's
operating expenses to exceed this limit in any such year. Charges related
to asset impairment, bankruptcy of lessees, lease payment defaults,
extinguishment of debt or uninsured losses are generally not considered
unusual and nonrecurring. A determination that a charge is unusual and
nonrecurring, such as the costs of significant litigation that are not
associated with day-to day operations, or uninsured losses that are beyond
the size or scope of the usual course of business based on the event
history and experience of the Advisor and Independent Directors, is made
at the sole discretion of the Independent Directors. The Company will
record any reimbursement of operating expenses as a liability until any
contingencies are resolved and will record the reimbursement as a
reduction of asset management and performance fees at such time that a
reimbursement is fixed, determinable and irrevocable. The operating
expenses of the Company have not exceeded the amount that would require
the Advisor to reimburse the Company.
The Advisor will be entitled to receive subordinated disposition fees
based upon the cumulative proceeds arising from the sale of Company assets
since the inception of the Company, subject to certain conditions.
Pursuant to the subordination provisions of the Advisory Agreement, the
disposition fees may be paid only after the shareholders receive 100% of
their initial investment from the proceeds of asset sales and a cumulative
annual return of 6% (based on an initial share price of $10) since the
inception of the Company. The Advisor's interest in such disposition fees
amounts to $1,375,681 as of December 31, 2003. Payment of such amount,
however, cannot be made until the subordination provisions are met. The
Company has concluded that payment of such disposition fees is probable
and all fees from completed property sales have been accrued. Subordinated
disposition fees are included in the determination of realized gain or
loss on the sale of properties. The obligation for disposition fees is
included in due to affiliates in the accompanying consolidated financial
statements.
The Company owns interests in entities which range from 15% to 50% and a
jointly-controlled 50% tenancy-in-common interest in a property subject to
a net lease with remaining interests held by affiliates.
The Company is a participant in an agreement with certain affiliates for
the purpose of leasing office space used for the administration of real
estate entities and for sharing the associated costs. Pursuant to the
terms of the agreement, the Company's share of rental, occupancy and
leasehold improvement costs is based on gross revenues. Expenses incurred
in 2003, 2002, and 2001 were $223,996, $232,498, and $232,481,
respectively. The Company's current share of future minimum lease payments
is $429,000 through 2006.
3. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases are approximately as follows:
Year Ending December 31,
------------------------
2004 $ 34,775,000
2005 35,335,000
2006 35,504,000
2007 35,561,000
2008 35,973,000
Thereafter through 2021 250,951,000
------------
Total $428,099,000
Contingent rents (including percentage rents and CPI-based increases) were
approximately $2,078,000, $2,396,000, and $1,938,000 in 2003, 2002, and
2001 respectively.
4. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
23
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
------------
2003 2002
---- ----
Minimum lease payments
receivable $27,114,350 $35,954,860
Unguaranteed residual value 19,127,500 24,987,051
----------- -----------
46,241,850 60,941,911
Less: unearned income 27,114,350 35,954,860
----------- -----------
$19,127,500 $24,987,051
=========== ===========
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable direct financing leases are approximately as follows:
Year Ending December 31,
------------------------
2004 $ 2,263,000
2005 2,263,000
2006 2,263,000
2007 2,263,000
2008 2,263,000
Thereafter through 2016 15,799,000
-----------
Total $27,114,000
Contingent rents (including CPI-based increases) were approximately,
$322,000, $384,000, and $274,000 in 2003, 2002 and 2001, respectively.
5. Equity Investments:
The Company owns interests in properties leased to corporations through
non-controlling interests. 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 Retail
Distribution Group, 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
France, S.A. ("Carrefour"). The equity investments in Starmark, Medica and
Carrefour were acquired during the quarter ended March 31, 2003.
Distributions and allocations of income or loss from the equity investees
are based on ownership percentages and no fees are paid by the Company or
the partnerships to any of the general partners of the limited
partnerships.
Summarized combined financial information of the Company's equity
investees is as follows:
(In thousands) December 31,
------------
2003 2002
---- ----
Assets (primarily real estate) $914,682 $505,304
Liabilities (primarily limited recourse mortgage
notes payable) 635,153 284,254
Capital 279,529 221,050
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues (primarily rental revenues) $86,273 $39,758 $33,031
Expenses (primarily interest on mortgages and
depreciation) (55,177) (25,525) (20,627)
------- ------- -------
Net income $31,096 $14,233 $12,404
======= ======= =======
A. In February 2002, the Best Buy partnership paid off a mortgage loan of
$25,743,178 and incurred a charge on the early extinguishment of debt of
$2,086,384, of which the Company's share was $771,962. The retired loan
provided
24
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for monthly payments of interest and principal of $291,290 at an annual
interest rate of 9.01%. The general partnership obtained a new limited
recourse loan of $28,500,000 which provides for monthly payments of
interest and principal of $210,427 at an annual interest rate of 7.49%
based on a 25-year amortization schedule. The loan matures in May 2012 at
which time a balloon payment is scheduled.
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.
On November 27, 2003, the limited liability company purchased an
additional Carrefour property in Nimes, France for Euro 17,277,481
($20,634,503 as of the date of acquisition) and obtained additional
recourse mortgage financing of Euro 14,025,000 ($16,750,058) which was
added to the existing mortgage balance on the Carrefour properties. The
lease for the Nimes property provides for annual rent of Euro 1,608,750
($1,921,330) and has a term through November 2012 with annual rent
increases based on the INSEE.
In connection with the purchase of the Nimes property, W. P. Carey & Co.
LLC ("W. P. Carey"), the parent company of the Advisor, purchased a 22.5%
interest in the Carrefour properties at which time the Company's interest
in the Carrefour properties was reduced from 35% to 27.125%. W. P. Carey's
purchase price was based on an independent appraisal of the properties. In
connection with the sale of the interest, the Company recognized a gain of
$1,432,858 including a $1,069,581 increase in the proportionate fair value
of the real estate sold and $363,277 which resulted from an increase in
value attributable to changes in foreign currency rates with the Euro and
changes in the carrying cost of the property.
On February 7, 2003, the Company and two affiliates, Corporate Property
Associates 14 Incorporated ("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.
6. Mortgage Financing Through Loan Securitization:
25
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2002, the Company and three affiliates, W.P. Carey & Co. LLC, Carey
Institutional Properties Incorporated ("CIP(R)")and Corporate Property
Associates 14 Incorporated ("CPA(R):14") obtained an aggregate of
approximately $172,335,000 of limited recourse mortgage financing
collateralized by 62 leased properties. The lender pooled the loans into a
trust, Carey Commercial Mortgage Trust, a non-affiliate, whose sole assets
consist solely of the loans, and sold interests in the trust as
collateralized mortgage obligations in a private placement to
institutional investors (the "Offered Interests"). The Company and the
three affiliates acquired a separate class of subordinated interests in
the trust (the "CPA(R) Interests"). The amount of CPA(R) Interests
acquired by the Company was proportional to the mortgage amounts obtained.
All of the mortgage loans provide for payments of principal and interest
at an annual rate of 7.5% and are based on a 25-year amortization
schedule. Each loan is collateralized by mortgages on the properties and
lease assignments. Under the lease assignments, the lessees direct their
rent payment to the mortgage servicing company which in turn distributes
amounts in excess of debt service requirements to the applicable lessors.
Under certain limited conditions, a property may be released from its
mortgage by the substitution of another property. Such substitution is
subject to the approval of the trustee of the trust.
The initial Offered Interests consisted of $148,206,000 of the mortgage
loan balances, with different tranches of principal entitled to
distributions at annual interest rates as follows: $119,772,000 - 5.97%,
$9,478,000 - 6.58%, $9,478,000 - 7.18% and $9,478,000 - 8.43%. The assumed
final distribution dates for the four classes of Offered Interests range
from December 2011 through March 2012.
The CPA(R) Interests were purchased for $24,128,739 of which the Company's
share was $7,238,622, or 30%, and are comprised of two components, a
component that will receive payments of principal and interest and a
component that will receive payments of interest only. The CPA(R)
Interests are subordinated to the Offered Interests and will be payable
only when and if all distributions to the Offered Interests are current.
The assumed final distribution date for the CPA(R) Interests is June 30,
2012. The distributions to be paid to the CPA(R) Interests do not have a
stated rate of interest and will be affected by any shortfall in rents
received from lessees or defaults at the mortgaged properties. As of the
purchase date, the Company's cost basis attributable to the principal and
interest and interest only components was $4,334,840 and $2,903,782,
respectively. Over the term of its ownership interest in the CPA(R)
Interests, the value of the interest only component will fully amortize to
$0 and the principal and interest component will amortize to its
anticipated face value of its share in the underlying mortgages (which
currently is $7,238,622). For financial reporting purposes, the effect of
such amortization is reflected in interest income. Interest income,
including all related amortization, is recognized using an effective
interest method.
The Company is accounting for its interest in the CPA(R) Interests as an
available-for-sale security and it is measured at fair value with all
gains and losses from changes in fair value reported as a component of
other comprehensive income as part of shareholders' equity. The fair value
of the Company's CPA(R) Interests was $8,150,462 and $7,510,030,
reflecting a cumulative unrealized gain of $1,078,004 and $307,999 and
accumulated amortization of $166,164 and $36,591 at December 31, 2003 and
2002, respectively. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market
rates and the credit quality of the underlying lessees.
The key variable in determining fair value of the CPA(R) Interests is
current interest rates. As required by SFAS No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities," a sensitivity analysis of the current value of the CPA(R)
Interests based on adverse changes in the market interest rates of 1% and
2% is as follows:
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Estimated fair value of CPA(R)Interests $8,150,462 $7,753,464 $7,382,998
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.
In 2002, the Company obtained new mortgage financing of $46,335,000 of
which $8,908,000 was used to pay off existing loans. In connection with
paying off the loans, the Company incurred prepayment charges of
$1,225,092. After paying off the loans, incurring costs in connection with
obtaining the new mortgages and purchasing its interests in the trust for
$8,582,022, the Company retained cash of approximately $26,400,000, which
includes a capital distribution from an equity investee that refinanced
its loan in connection with the transaction. The loans which were paid off
bore interest at annual rates ranging from 8.19% to 8.92%.
26
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company owns a 45% interest in two properties leased to ShopRite
Supermarkets, Inc. ("ShopRite") (formerly Big V Holding Corp.) with CIP(R)
owning the remaining interest. In connection with structuring the
transaction, the jointly-owned properties were contributed to limited
partnerships with CIP(R) owning a 55% interest as general partner.
Accordingly, the Company's interest in the limited partnership is
accounted for under the equity method of accounting. The limited
partnership obtained new mortgage financing of $10,890,000 in connection
with the securitization with an annual interest rate of 7.5% and paid off
an existing loan of $6,721,103 with an annual interest rate of 9%.
7. Mortgage Notes Payable and Line of Credit:
Mortgage notes payable, all of which are limited recourse to the Company,
are collateralized by an assignment of various leases and by real property
with a carrying value of approximately $300,057,000. As of December 31,
2003, mortgage notes payable had fixed interest rates ranging from 6.5% to
8.75% per annum.
Scheduled principal payments during each of the five years following
December 31, 2003 are as follows:
Year Ending December 31, Total Debt
------------------------ ----------
2004 $ 5,953,164
2005 10,446,616
2006 11,539,386
2007 24,545,713
2008 22,552,860
Thereafter through 2021 109,167,796
------------
Total $184,205,535
============
The Company's credit facility matured in October 2003.
Interest paid, was $14,536,417, $13,661,932, and $13,085,646 in 2003,
2002, and 2001 respectively. There was no capitalized interest in 2003,
2002 and 2001.
8. Dividends:
Dividends paid to shareholders consist of ordinary income, capital gains,
return of capital or a combination thereof for income tax purposes. For
the three years ended December 31, 2003, dividends paid per share reported
for tax purposes were as follows:
2003 2002 2001
---- ---- ----
Ordinary income $ .72 $ .43 $ .44
Return of capital .11 .39 .38
-------- -------- --------
$ .83 $ .82 $ .82
======== ======== ========
A dividend of $.2067 per share for the quarter ended December 31, 2003
($6,271,709) was declared in December 2003 and paid in January 2004.
9. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of
2003, 2002, and 2001 lease revenues are as follows:
2003 2002 2001
---- ---- ----
Per Statements of Income:
Rental income from operating leases $ 40,421,838 $ 39,879,335 $ 38,699,610
Interest income from direct financing leases 2,585,832 4,149,082 5,197,590
Adjustments:
Share of leasing revenues applicable to
minority interest (3,096,751) (3,099,216) (3,071,528)
Share of leasing revenues from equity
investments 25,886,413 16,360,259 13,206,572
------------ ------------ ------------
$ 65,797,332 $ 57,289,460 $ 54,032,244
============ ============ ============
27
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2003, 2002, and 2001 the Company earned its share of net lease revenues
from its direct and indirect ownership of real estate from the following
lease obligors:
2003 % 2002 % 2001 %
---- - ---- - ---- -
Applied Materials, Inc. (a) $ 6,285,154 10% $ 6,290,326 11% $ 6,238,516 12%
Advanced Micro Devices, Inc. (b) 3,258,938 5 3,258,938 6 3,048,500 6
Carrefour France, S.A. (b) 3,216,117 5 -- -- -- --
Galyan's Trading Company, Inc. 2,733,154 4 2,733,154 5 2,733,154 5
Starmark Camhood, L.L.C. (b) 2,456,045 4 -- -- -- --
Perry Graphic Communications, Inc. and
Judd's Incorporated 2,191,567 3 2,191,567 4 2,191,567 4
TruServ Corporation (b) 2,166,685 3 4,884 -- -- --
Spectrian Corporation 2,151,000 3 2,040,246 4 2,015,521 4
Special Devices, Inc. (b) 1,995,156 3 1,962,000 3 1,118,967 2
Westell Technologies, Inc. 1,983,707 3 1,936,022 3 1,916,386 4
Scott Companies, Inc. 1,868,772 3 2,062,281 4 2,062,281 4
Career Education Corporation 1,737,397 3 1,736,808 3 1,736,808 3
Best Buy Co., Inc. (b) 1,736,427 3 1,749,731 3 1,760,787 3
Telos Corporation 1,665,539 2 1,634,969 3 1,543,258 3
Q Clubs, Inc. 1,556,869 2 1,541,135 3 1,470,319 3
PPD Development, Inc. 1,504,190 2 1,504,190 3 1,401,088 3
Del Monte Corporation (c) 1,477,714 2 1,381,982 2 1,286,250 2
Sicor, Inc. (b) 1,472,736 2 1,472,736 3 1,472,736 3
The Upper Deck Company (b) 1,452,220 2 1,452,220 3 1,419,134 3
Silgan Containers Corporation 1,421,353 2 1,348,177 2 1,275,000 2
The Bon-Ton Stores, Inc. 1,411,708 2 1,348,120 2 1,348,120 2
McLane Company, Inc. (b) 1,408,722 2 1,393,046 2 1,383,372 3
Compucom Systems, Inc. (b) 1,408,043 2 1,382,199 2 1,304,667 2
Childtime Childcare, Inc. 1,272,818 2 1,190,074 2 1,190,074 2
Medica-France, SA (b) 1,252,285 2 -- -- -- --
Textron, Inc. (b) 1,239,739 2 1,222,678 2 1,137,375 2
Jen-Coat, Inc. 1,210,000 2 1,210,000 2 457,111 1
ShopRite Supermarkets Inc. (formerly Big
V Holding Corporation.) (d) 1,093,122 2 1,083,738 2 1,075,406 2
Other 11,170,155 18 12,158,239 21 11,445,847 20
----------- ---- ----------- ---- ----------- ----
$65,797,332 100% $57,289,460 100% $54,032,244 100%
=========== ==== =========== ==== =========== ====
(a) Net of amounts applicable to minority interests owned by Corporate
Property Associates 14 Incorporated.
(b) Represents the Company's proportionate share of lease revenues from its
equity investment.
(c) Includes the Company's proportionate share of lease revenues from its
equity investment for the period subsequent to September 30, 2001.
(d) Includes the Company's proportionate share of lease revenues from its
equity investment for the period subsequent to July 31, 2002.
10. Segment Information:
The Company has determined that it operates in one business segment, real
estate operations with domestic and foreign investments. The Company had
no foreign real estate investment until March 2003.
For 2003, geographic information for the real estate operations segment is
as follows:
Domestic Foreign Total Company
Revenues $ 47,731,932 -- $ 47,731,932
Expenses 36,515,616 -- 36,515,616
Income from equity investments 9,085,145 $ 339,612 9,424,757
Net operating income(1) 18,773,860 339,612 19,113,472
Total assets 448,333,483 13,857,379 462,190,862
Total long-lived assets 398,529,630 13,857,379 412,387,009
28
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Net operating income excludes gains and losses and discontinued
operations.
11. Impairment Charges:
2003
The Company owns a property in Newark, Delaware which, for the past
several years has been operated as a multi-tenant facility. During 2003,
the occupancy rate of the property declined substantially. In connection
with this change in circumstances, the property has been written down to
its estimated fair value and an impairment charge of $1,000,000 was
recognized.
12. Gain on Sale of Real Estate and Derivatives Contract:
2003
In October 2002, the Company and Rheometric entered into an agreement that
would allow Rheometric to terminate its lease for its facility in
Piscataway, New Jersey upon completion of an asset sale of one of its
lines of business. In January 2003, the Rheometric sale was completed, at
which time the lease termination agreement became effective and Rheometric
changed its name to Proterion. In connection with the settlement, the
Company recognized $3,042,227 which is included in interest and other
income in the accompanying consolidated financial statements for the year
ended December 31, 2003. The settlement included a grant of 650,000 shares
of common stock.
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 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 December 31,
2003, the fair value of the Proterion shares held by the Company was
$520,019 based on a quoted value per share of $0.47.
2001
On May 1, 2001, the Company sold its property in San Diego, California
leased to BAE Systems, Inc. ("BAE") for $30,497,865, and recognized a gain
of $8,863,709. The BAE sale was structured as a noncash exchange for tax
purposes so that the proceeds from sale were placed in an escrow account
and used in connection with additional real estate acquisitions in 2001.
13. Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective for financial statements issued
for fiscal years beginning after December 15, 2001, the results of
operations and gain or loss on sales of real estate for properties sold or
held for sale are to be reflected in the consolidated statements of
operations as "Discontinued Operations" for all periods presented. The
provisions of SFAS No. 144 are effective for disposal activities initiated
by the Company's commitment to a plan of disposition after the date it is
initially applied (January 1, 2002). Properties held for sale as of
December 31, 2001 are not included in discontinued operations.
In July 2003, the Company and Sentry Technology Corporation ("Sentry")
entered into a termination agreement. Sentry agreed not to contest an
eviction from the Company's property in Hauppauge, New York, in
consideration for forgiveness of rent arrearages of $486,000. Under the
agreement, Sentry vacated the property in September 2003, and assigned the
Company the right to collect rent directly from Sentry's sub-tenants. In
addition, Sentry issued 1,000,000 shares of its common stock to the
Company which had a quoted per share value of $0.03 as of the date of
issuance and a $250,000 promissory note which Sentry is scheduled to repay
over a three-year period. As of December 31, 2003, the fair value of
Sentry shares held by the Company was $140,000. In connection with the
settlement, the Company recognized other income of $30,000, an amount
equal to the value of the shares received. Because of Sentry's inability
29
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to meet lease obligations, the promissory note has been fully reserved for
and settlement income from the note will be recognized as received.
In September 2003, the Company entered into an agreement to sell the
Hauppauge property for $6,300,000, less selling costs, subject to the
buyer's due diligence review which is currently being performed.
Accordingly, the property is classified as held for sale with a carrying
value of $4,361,035 as of December 31, 2003.
The Company owns a property in Ashburn , Virginia, which was leased to
International Management Consulting , Inc. ("IMCI"). Following IMCI's
bankruptcy, the lease was rejected in October 2003. The Company has
entered into an agreement, subject to certain conditions, to sell the
Ashburn property for $7,500,000. The property is classified as held for
sale with a carrying value of $6,092,368 as of December 31, 2003.
The results of operations for the Hauppauge and Ashburn properties are
included in discontinued operations and reflect income of $20,766,
$1,041,130 and $1,075,515 for the years ended December 31, 2003, 2002 and
2001, respectively. A summary of Discontinued Operations for the years
ended December 31, 2003, 2002 and 2001 is as follows.
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues (primarily rental revenues and
miscellaneous income) $ 1,307,370 $ 1,384,189 $ 1,349,030
Expenses (primarily interest on mortgages,
depreciation and property expenses) (1,286,604) (343,059) (273,515)
----------- ----------- -----------
Income from discontinued operations $ 20,766 $ 1,041,130 $ 1,075,515
=========== =========== ===========
As a result of classifying properties as held for sale, no depreciation
has been incurred from the date of reclassification. The effect of
suspending depreciation expenses was $20,759 in 2003. There was no effect
in 2002 and 2001.
14. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage notes payable was
approximately $186,724,000 and $201,892,000 at December 31, 2003 and 2002,
respectively. The fair value of the mortgage notes payable was evaluated
using a discounted cash flow model with a rate that takes into account the
credit of the tenant and interest rate risk.
15. Selected Quarterly Financial Data (unaudited):
Three Months Ended
------------------
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-------------- ------------- ------------------ -----------------
Revenues $ 14,053,477 $ 11,280,927 $ 12,178,335 $ 10,219,193
Expenses 8,739,172 8,850,876 10,192,899 8,732,669
Income from continuing operations 7,397,598 4,569,879 4,248,254 5,264,088
Income from continuing operations per
share - basic and diluted .25 .15 .13 .18
Net income 7,483,488 4,744,395 3,851,592 5,421,110
Net income per share - basic and diluted .25 .15 .13 .18
Dividends declared per share .2065 .2067 .2067 .2067
Three Months Ended
------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-------------- ------------- ------------------ -----------------
Revenues $ 11,128,773 $ 11,177,800 $ 11,407,927 $ 11,580,885
Expenses 7,621,735 7,943,873 9,581,575 8,585,040
Income from continuing operations 3,916,276 4,110,428 3,170,079 4,412,505
Income from continuing operations per
share - basic and diluted .13 .14 .10 .15
Net income 4,196,853 4,382,728 3,426,214 4,644,623
Net income per share - basic and diluted .14 .15 .11 .15
Dividends declared per share .2057 .2059 .2061 .2063
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MARKET FOR THE PARTNERSHIP'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the
Company.
As of December 31, 2003 there were 13,550 holders of record of the Shares
of the Company.
In accordance with the Prospectus of the Company, dividends will be paid
quarterly regardless of the frequency with which such dividends are
declared. The Company is required to distribute annually at least 90% of
its Distributable REIT Taxable Income to maintain its status as a REIT.
The following shows the frequency and amount of dividends paid for the
past three years.
Cash Dividends Paid Per Share
-----------------------------
2003 2002 2001
---- ---- ----
First quarter $.2063 $.2055 $.2047
Second quarter .2065 .2057 .2049
Third quarter .2067 .2059 .2051
Fourth quarter .2067 .2061 .2053
------ ------ ------
$.8262 $.8232 $.8200
====== ====== ======
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and
without charge, a copy of the Annual Report on Form 10-K ("10-K") for the
year ended December 31, 2003 as filed with the Securities and Exchange
Commission ("SEC"). The 10-K may also be obtained through the SEC's EDGAR
database at www.sec.gov.
31