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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 033-68728
-------------------------
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3726306
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
-------------------------
CPA(R):12 has SHARES OF COMMON STOCK registered pursuant to Section 12(g)
of the Act.
CPA(R):12 HAS NO SECURITIES registered on any exchanges.
CPA(R):12 does not have any Securities registered pursuant to Section 12(b)
of the Act.
CPA(R):12 (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ].
CPA(R):12 has no active market for common stock at May 6, 2004.
CPA(R):12 has 30,306,231 shares of common stock, $.001 par value
outstanding at May 6, 2004.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
Item 3. - Quantitative and Qualitative Disclosure About Market Risk 13
Item 4. - Controls and Procedures 13
PART II - Other Information
Item 2. - Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 14
Item 4. - Submission of Matters to a Vote of Security Holders 14
Item 6. - Exhibits and Reports on Form 8-K 14
Signatures 15
- -----------------
* The summarized condensed consolidated financial statements contained herein
are unaudited; however, in the opinion of management, all adjustments necessary
for a fair presentation of such financial statements have been included.
1
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited) (Note)
ASSETS:
Land and buildings, net of accumulated depreciation of $43,038,388 at
March 31, 2004 and $41,176,156 at December 31, 2003 $301,190,817 $303,053,049
Net investment in direct financing leases 19,127,500 19,127,500
Equity investments 90,094,932 90,206,460
Assets held for sale 4,361,035 10,453,403
Cash and cash equivalents 17,729,445 13,305,343
Marketable securities 8,640,710 8,810,482
Other assets 16,223,273 17,234,625
------------ ------------
Total assets $457,367,712 $462,190,862
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $179,539,666 $180,981,200
Mortgage note payable on asset held for sale 3,211,931 3,224,335
Accrued interest 1,014,653 1,035,859
Accounts payable and accrued expenses 2,736,068 2,473,641
Due to affiliates 3,000,754 3,062,758
Deferred acquisition fees payable to affiliate 5,190,897 6,658,067
Dividends payable 6,287,569 6,271,709
Prepaid rental income and security deposits 4,595,559 5,131,254
------------ ------------
Total liabilities 205,577,097 208,838,823
------------ ------------
Minority interest 8,048,547 8,021,816
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares; issued and
outstanding, 31,404,314 shares at March 31, 2004 and 31,284,287
shares at December 31, 2003 31,404 31,284
Additional paid-in capital 284,294,640 282,962,414
Dividends in excess of accumulated earnings (31,929,246) (29,949,878)
Accumulated other comprehensive income 1,147,331 1,594,782
------------ ------------
253,544,129 254,638,602
Less, treasury stock at cost, 1,025,000 shares at March 31, 2004 and
975,975 shares at December 31, 2003 (9,802,061) (9,308,379)
------------ ------------
Total shareholders' equity 243,742,068 245,330,223
------------ ------------
Total liabilities, minority interest and shareholders' equity $457,367,712 $462,190,862
============ ============
The accompanying notes are an integral part of the
condensed consolidated financial statements.
Note: The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements at that date.
2
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Revenues:
Rental income $ 9,818,512 $ 10,284,034
Interest income from direct financing leases 646,458 646,458
Other operating income 59,078 2,771,040
------------ ------------
10,524,048 13,701,532
------------ ------------
Operating expenses:
Depreciation 1,862,232 1,859,093
General and administrative 1,008,704 976,256
Property expenses 2,930,652 2,155,443
------------ ------------
5,801,588 4,990,792
------------ ------------
Income from continuing operations before other interest income, minority
interest, equity investments, (loss) gain and interest expense 4,722,460 8,710,740
Other interest income 251,934 351,945
Minority interest in income (405,571) (378,692)
Income from equity investments 3,167,958 2,471,805
Unrealized losses on foreign currency transactions and warrants (121,759) (247,160)
Gain on settlement of derivatives contract -- 237,340
Interest expense (3,548,573) (3,742,623)
------------ ------------
Income from continuing operations 4,066,449 7,403,355
Discontinued operations:
(Loss) income from operations of discontinued properties (139,807) 80,133
Gain on sale of real estate 381,559 --
------------ ------------
Income from discontinued operations 241,752 80,133
------------ ------------
Net income $ 4,308,201 $ 7,483,488
============ ============
Basic and diluted income per common share:
Earnings from continuing operations $ .13 $ .25
Earnings from discontinued operations .01 --
------------ ------------
Net income $ .14 $ .25
============ ============
Weighted average shares outstanding - basic and diluted 30,396,414 30,155,234
============ ============
The accompanying notes are an integral part of the
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
----------------------------
2004 2003
----------- -----------
Net income $ 4,308,201 $ 7,483,488
Other comprehensive income:
Change in unrealized appreciation on marketable securities (137,732) 161,053
Change in foreign currency translation adjustment (309,719) (154,148)
----------- -----------
(447,451) 6,905
----------- -----------
Comprehensive income $ 3,860,750 $ 7,490,393
=========== ===========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 4,308,201 $ 7,483,488
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, including gain on sale of real estate (241,752) (80,133)
Depreciation and amortization 1,970,098 1,997,272
Straight-line rent adjustments (227,908) (341,096)
Income from equity investments in excess of distributions received (1,251,677) (586,042)
Fees paid by issuance of stock 861,071 712,648
Minority interest in income 405,571 378,692
Unrealized losses on foreign currency transactions and derivative instruments 121,759 247,160
Gain on settlement of derivatives contract -- (237,340)
Lease termination proceeds assigned to lender -- (2,250,000)
Securities received in connection with lease termination agreement -- (338,000)
Change in operating assets and liabilities, net (265,875) 137,047
------------ ------------
Net cash provided by continuing operations 5,679,488 7,123,696
Net cash (used in) provided by discontinued operations (135,704) 143,517
------------ ------------
Net cash provided by operating activities 5,543,784 7,267,213
------------ ------------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 351,832 345,085
Distribution of mortgage financing proceeds received from equity investment -- 3,738,075
Receipt of amount due from sale of equity investment 1,429,567 --
Purchases of real estate and equity investments and additional capitalized costs -- (21,021,240)
Proceeds from sale of real estate 6,692,983 --
Payment of deferred acquisition fees to an affiliate (1,467,170) (1,274,925)
------------ ------------
Net cash provided by (used in) investing activities 7,007,212 (18,213,005)
------------ ------------
Cash flows from financing activities:
Prepayments of mortgage principal -- (5,199,405)
Payments on mortgage principal (1,453,938) (1,374,879)
Distributions to minority interest partner (378,840) (357,719)
Payment of financing costs and mortgage deposits -- (71,228)
Proceeds from issuance of shares, net of costs 471,275 191,028
Dividends paid (6,271,709) (6,223,080)
Purchase of treasury stock (493,682) (312,355)
------------ ------------
Net cash used in financing activities (8,126,894) (13,347,638)
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,424,102 (24,293,430)
Cash and cash equivalents, beginning of period 13,305,343 40,084,470
------------ ------------
Cash and cash equivalents, end of period $ 17,729,445 $ 15,791,040
============ ============
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of
Corporate Property Associates 12 Incorporated (the "Company") have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to
Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and W. P. Carey & Co. LLC (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 Advisor has elected at its option to receive the performance fee
in restricted shares of common stock rather than cash. The Advisor is also
reimbursed for the actual cost of personnel needed to provide administrative
work necessary to the operation of the Company. The Company incurred asset
management fees of $916,408 and $792,864 for the three months ended March 31,
2004 and 2003, respectively, with performance fees in like amounts. For the
three months ended March 31, 2004 and 2003, the Company incurred personnel cost
reimbursements of $309,344 and $357,212, respectively.
Fees are payable to the Advisor in connection with services performed relating
to the identification, evaluation, financing and purchase of properties. No such
fees were incurred for the three months ended March 31, 2004. Current and
deferred fees incurred for the three months ended March 31, 2003 were $667,539
and $534,031, respectively.
Note 3. Equity Investments:
The Company owns interests in properties leased to corporations through
noncontrolling interests in (i) various partnerships and limited liability
companies in which its ownership interests are 50% or less and the Company
exercises significant influence, and (ii) tenancies-in-common subject to common
control. The ownership interests range from 15% to 50%. All of the underlying
investments are owned with affiliates that have similar investment objectives as
the Company. The lessees are Best Buy, Sicor, Inc., The Upper Deck Company,
Advanced Micro Devices, Inc., Compucom Systems, Inc., Textron, Inc., McLane
Company, Inc., The Retail Distribution Group, Inc., Del Monte Corporation,
Special Devices, Inc., ShopRite Supermarkets, Inc., TruServ Corporation,
Starmark Camhood LLC, Medica-France, S.A. and affiliates of Carrefour, S.A.
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) March 31, 2004 December 31, 2003
-------------- -----------------
Assets (primarily real estate) $906,174 $914,682
Liabilities (primarily mortgage notes payable) 628,393 635,153
Partners' and members' equity 277,781 279,529
Three Months Ended
March 31,
------------------------
2004 2003
------- --------
Revenues (primarily rental revenue) $22,702 $ 20,466
Expenses (primarily interest on mortgages and depreciation) (14,575) (11,809)
------- --------
Net income $ 8,127 $ 8,657
======= ========
5
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 4. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust ("CCMT") mortgage securitization as an available-for-sale
marketable security and it is measured at fair value with all gains and losses
from changes in fair value reported as a component of other comprehensive income
as part of shareholders' equity. As of March 31, 2004, the fair value of the
Company's interests was $8,304,747, reflecting an aggregate unrealized gain of
$1,264,328 and cumulative net amortization of $198,203 ($32,040 for the three
months ended March 31, 2004). The fair value of the Company's interests in the
trust is determined using a discounted cash flow model with assumptions of
market rates and the credit quality of the underlying lessees.
One of the key variables in determining fair value of the subordinated interest
is current interest rates. As required by Statement of Financial Accounting
Standards ("SFAS") No. 140, "Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities," a sensitivity analysis of the
current value of the interest based on adverse changes in market interest rates
of 1% and 2% is as follows:
Fair Value as of
March 31, 2004 1% Adverse Change 2% Adverse Change
-------------- ----------------- -----------------
Fair value of the interests $8,304,747 $7,902,681 $7,527,035
The above sensitivity is hypothetical and changes in fair value, based on a 1%
or 2% variation, should not be extrapolated because the relationship of the
change in assumption to the change in fair value may not always be linear.
Note 5. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
leasing revenues for the three-month periods ended March 31, 2004 and 2003 are
as follows:
2004 2003
----------- -----------
Per Statements of Income:
Rental income from operating leases $ 9,818,512 $10,284,034
Interest from direct financing leases 646,458 646,458
Adjustment:
Share of leasing revenue applicable to minority interest (789,227) (774,426)
Share of leasing revenue from equity investments 6,929,471 5,443,583
----------- -----------
$16,605,214 $15,599,649
=========== ===========
For the three-month periods ended March 31, 2004 and 2003, the Company earned
its net leasing revenues from its investments from the following lease obligors:
2004 % 2003 %
---------- ------ ---------- ------
Applied Materials, Inc. (a) $1,601,829 10% $1,571,615 10%
Carrefour France, SA (b) 1,033,065 6 212,556 1
Advanced Micro Devices, Inc. (b) 814,734 5 814,734 5
Starmark Camhood, L.L.C. (b) 685,215 4 400,400 3
Galyan's Trading Company 683,288 4 683,288 4
Perry Graphic Communications, Inc. and Judd's Incorporated 547,892 3 547,892 4
TruServ Corporation (b) 541,671 3 541,671 3
Spectrian Corporation 537,750 3 537,750 3
Special Devices, Inc. (b) 509,628 3 490,500 3
Westell Technologies, Inc. 495,927 3 495,927 3
Career Education Corporation 434,202 3 434,202 3
Medica-France, SA (b) 433,387 3 80,451 1
Best Buy Co., Inc. (b) 432,254 3 436,189 3
Telos Corporation 416,385 3 416,385 3
Q Clubs, Inc. 391,822 2 386,613 2
6
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
2004 % 2003 %
---------- ------ ---------- ------
PPD Development, Inc. 376,047 2 376,047 2
Del Monte Corporation (b) 369,428 2 341,906 2
Sicor, Inc. (b) 368,184 2 368,184 3
The Upper Deck Company (b) 363,055 2 363,055 2
The Bon-Ton Stores, Inc. 360,876 2 337,030 2
Silgan Containers Corporation 355,338 2 355,338 2
McLane Company, Inc. (b) 354,280 2 350,360 2
Compucom Systems, Inc. (b) 352,011 2 352,011 2
Childtime Childcare, Inc. 320,085 2 312,563 2
Textron, Inc. (b) 309,935 2 309,935 2
Jen-Coat, Inc. 302,500 2 302,500 2
ShopRite Supermarkets, Inc. (b) 276,067 2 224,912 1
Other (b) 2,938,359 18 3,555,635 25
----------- --- ----------- ---
$16,605,214 100% $15,599,649 100%
=========== === =========== ===
- ----------------
(a) Net of minority interest of an affiliate.
(b) Represents the Company's proportionate share of lease revenues from its
equity investments.
Note 6. Assets Held for Sale and Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the results of operations and gain or loss on sales of real
estate for properties sold or held for sale are reflected in the condensed
consolidated financial statements as "Discontinued Operations" for all periods
presented.
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. The sale of the Hauppauge property was completed in April
2004 for $6,300,000, less costs to sell. In connection with the sale, CCMT, the
lender of the mortgage loan on the property consented to the transfer of the
loan obligation to the Company's property in Austin, Texas which is leased to Q
Clubs, Inc. As of March 31, 2004 and December 31, 2003, the carrying value on
the Hauppauge property of $4,361,035 is reflected in the condensed consolidated
financial statements as assets held for sale. The loan on the Hauppauge property
as of March 31, 2004 and December 31, 2003 is reflected in the condensed
consolidated financial statements as mortgage note payable on assets held for
sale.
On March 18, 2004, the Company sold a property in Ashburn, Virginia and received
approximately $6,692,983, net of costs of sale. In connection with the sale, the
Company realized a gain of $381,559.
The results of operations for the Hauppauge property held for sale as of March
31, 2004 and the property in Ashburn, Virginia that was sold in March 2004 are
included in "Discontinued Operations" and are summarized as follows:
Three Months Ended
March 31,
----------------------
2004 2003
--------- ---------
Revenues (primarily rental revenues and miscellaneous income) $ 141,806 $ 389,022
Expenses (primarily interest on mortgages, depreciation and property expenses) (281,613) (308,889)
Gain on sale of real estate 381,559 --
--------- ---------
Income from discontinued operations $ 241,752 $ 80,133
========= =========
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 $52,861 for the three-month period ended March 31,
2004. There was no effect on depreciation expense for the three-month period
ended March 31, 2003.
7
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 7. Accounting Pronouncements:
In November 2002, the Financial Accounting Standards Board ("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 Statement of Financial Accounting Standards
("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. Accordingly, adoption of SFAS No. 148 did not impact the
Company.
In January 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. The adoption of FIN 46 did not have a
material impact on the financial statements as either the unconsolidated joint
ventures are not VIEs or for two unconsolidated investments which are VIEs, the
Company was not the primary beneficiary.
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
8
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
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 entered into before November 5, 2003. 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.
9
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 condensed consolidated financial statements and
notes thereto as of March 31, 2004 included in this quarterly report and
CPA(R):12's Annual Report on Form 10-K 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 the Annual Report on Form 10-K for
the year ended December 31, 2003. 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. Additionally, a description of CPA(R):12's critical accounting
estimates is included in the management's discussion and analysis in the Annual
Report on Form 10-K. There has been no significant change in such critical
accounting estimates.
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 other noncash charges such as depreciation and impairment charges. 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 three month period ended March 31,
2004, cash flow generated from operations and equity investments was not
sufficient to fully fund dividends paid, distributions to minority partners,
that is, to affiliates who have interests in investments that are included in
the Company's condensed consolidated financial statements, and scheduled
mortgage principal payments. Cash flow generated was $5,896,000 and the uses
were $8,105,000, a net operating shortfall of $2,209,000. CPA(R):12 has cash
balances of $17,729,000 and has since March 31, 2004 received $6,693,000 from a
sale of a property and will have the ability to use a portion of its cash
balance to purchase interests in real estate or pay down mortgage debt in order
to improve cash flows from operations. In determining the distribution rate to
shareholders, Management considers its projections of future operations.
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 noncontrolling interests in (i) a
master net lease for fifteen health club properties and (ii) properties in
France in order to attempt to offset the decrease in cash flow from the
underperforming properties.
RESULTS OF OPERATIONS:
Net income for the three-month period ended March 31, 2004 decreased by
$3,175,000 to $4,308,000 as compared with net income of $7,483,000 for the
three-month period ended March 31, 2003. Results for the three-month period
ended March 31, 2003 included lease termination income of $2,722,000. The
results for the three-month period ended March 31, 2004 reflected decreases in
rental income and other operating income, increases in property expenses which
were partially offset by an increase in income from equity investments and a
decrease in interest expense.
Lease revenues (rental income and interest income from direct financing leases)
decreased by $466,000 for the three-month period ended March 31, 2004. As the
result of vacancies and the termination of several short-term leases at
properties in Newark, Delaware and Piscataway, New Jersey, lease revenues
decreased by $286,000, for the three month period ended March 31, 2004.
Additionally, Scott Companies, Inc. entered into liquidation in November 2003. A
portion of the former Scott property in San Leandro is occupied by several
tenants under short-term leases and revenues from the former Scott property
decreased by $288,000 for the comparable quarters. Monthly rents at the former
Scott property are currently $50,000. These decreases in lease revenues were
partially
10
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
offset by $140,000 from rent increases at eleven properties during 2003 and
2004. The majority of these rent increases are based on formulas where rents are
indexed to increases in the Consumer Price Index. In October 2003, CPA(R):12
funded approximately $700,000 of improvements to its existing property leased to
Wal-Mart Stores, Inc. in exchange for an increase in annual rent of $110,000 and
a five-year extension to its lease term.
Other operating income decreased by $2,712,000 for the comparable periods;
however, the three-month period ended March 31, 2003 included lease termination
income of $2,722,000.
Property expense increased by $775,000 for the comparable periods of which
$367,000 was due to the increase in absorbing carrying costs from the Piscataway
and Newark properties. Carrying costs on the Piscataway and Newark properties
for the three months ended March 31, 2004 were $240,000. CPA(R):12's asset
management and performance fees increased $247,000 primarily as a result of the
acquisition of interests in properties during 2003.
The increase in income from equity investment is due to acquiring interests in
properties leased to Starmark Camhood LLC in February 2003 and Medica-France,
S.A. and Carrefour in March 2003. A distribution facility in Grand Rapids,
Michigan held as an equity investment had been vacant due to the termination of
a lease with Fleming Companies since March 2003, pursuant to Fleming's
bankruptcy. On January 1, 2004, The Retail Distribution Group entered into a
lease at the Grand Rapids property at an initial annual rent of $903,000 of
which the Company's share is $361,000. The lease has an initial term through
August 2009. The Retail Distribution lease is subject to adjustments because
Retail Distribution vacated another property which is still subject to lease.
The adjustments will be reduced for the sublease rentals Retail Distribution
receives from the other property.
CPA(R):12 faces several challenges including re-leasing the Newark, Piscataway
and former Scott properties. Garden Ridge Corporation, the lessee of a retail
property in Tulsa, Oklahoma has filed a petition of bankruptcy and is in the
process of preparing a plan of reorganization. CPA(R):12 anticipates that Garden
Ridge will decide whether it will seek to terminate its lease as part of its
plan of reorganization by the end of the second quarter. Annual rent from Garden
Ridge is $940,000. CPA(R):12 also owns a property in Chattanooga, Tennessee net
leased to The Garden Companies, Inc. which is experiencing financial
difficulties and has been unable to pay full rent since November 2003. CPA(R):12
granted a short-term deferral of rent to Garden Companies and is accepting
reduced monthly rent payments of $50,000 through June 15, 2004. The deferral
will allow Garden Companies relief while it seeks to stabilize its financial
condition. Annual rent from the Garden Companies lease is $920,000.
FINANCIAL CONDITION:
There has been no material change in CPA(R):12's financial condition since
December 31, 2003. CPA(R):12's cash balances have increased by $4,424,000 since
December 31, 2003 and Management believes CPA(R):12 has sufficient cash balances
to meet its working capital needs.
One of CPA(R):12's objectives is to use the cash flow from net leases (including
its equity investments) to meet operating expenses, service its debt and fund
dividends to shareholders. Cash flows from operations and equity investments of
$5,896,000 were not fully sufficient to pay quarterly dividends of $6,272,000,
scheduled mortgage principal installments of $1,454,000 and distributions of
$379,000 to minority interest partners. CPA(R):12 did not receive distributions
during the first quarter from its two equity investments in properties in
France. CPA(R):12's scheduled annual distributions from the two equity
investments are approximately $1,350,000, subject to fluctuations in foreign
currency exchange rates.
CPA(R):12's cash provided by investing activities included receiving $6,693,000,
net of costs, in connection with sale of the Ashburn, Virginia property and
$1,430,000 from the final payment of sale proceeds from a 2003 sale of a portion
of an interest in the Carrefour properties to an affiliate. CPA(R):12 used
$1,467,000 to pay the Advisor its annual installment of deferred acquisition
fees. Such fees are paid on an annual basis each January, over eight years,
pursuant to the Advisory Agreement.
In addition to using cash to pay dividends to shareholders, distributions to
minority partners and mortgage principal installments, CPA(R):12's financing
activities included purchasing treasury stock for $494,000 and issuing common
stock for $471,000.
11
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CPA(R):12 and three affiliates own subordinated interests in a mortgage pool
consisting of mortgage debt collateralized by properties and lease assignments
on properties owned by CPA(R):12 and its affiliates. The Garden Ridge property
is included in the mortgage pool and in the event the lease is terminated, cash
flow from this investment might be adversely affected as subordinated interests
in the mortgage pool are only paid after all other classes of ownership receive
their stated interests and related principal payments. CPA(R):12 was successful
in negotiating the substitution of a property in Austin, Texas as collateral for
a loan in the mortgage pool formerly on the Hauppauge property and would likely
seek to substitute one of its unleveraged properties in the event that the
Garden Ridge lease is terminated.
CPA(R):12 has no balloon payments due 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. Many of
the loans restrict CPA(R):12's ability to prepay a loan or provide for payment
of premiums if paid prior to its scheduled maturity, but allow defeasance of the
loan that is, a deposit is made to service the loan commitment even if the
underlying property is sold.
CPA(R):12's ability to sustain its dividend on a long-term basis will be
affected by its ability to generate cash from its properties in Piscataway,
Newark and San Leandro and the ability of Garden Companies and Garden Ridge to
fulfill their lease obligations. Management is aggressively seeking to re-lease
or sell its vacant properties in order to generate cash and reduce or eliminate
absorbing carrying costs on the properties. Because CPA(R):12 has substantial
cash resources, it may use its cash reserves to acquire real estate investments,
pay down debt or support its distribution rate at its current level.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CPA(R):12's contractual obligations and commitments as of March 31,
2004 is as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
-------- -------- -------- -------- -------- -------- ----------
Obligations:
Limited recourse mortgage notes payable(1) $182,752 $ 4,499 $ 10,447 $ 11,539 $ 24,546 $ 18,049 $113,672
Deferred acquisition fees 5,191 -- 1,420 1,223 828 576 1,144
Subordinated disposition fees 1,595 -- -- -- -- -- 1,595
Commitments:
Share of minimum rents payable under office
cost-sharing agreement 379 106 156 117 -- -- --
-------- -------- -------- -------- -------- -------- --------
$189,917 $ 4,605 $ 12,023 $ 12,879 $ 25,374 $ 18,625 $116,411
======== ======== ======== ======== ======== ======== ========
- ----------------
(1) The limited recourse mortgage notes payable were obtained in connection
with the acquisition of properties in the ordinary course of business.
12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risk to which CPA(R):12 is exposed is interest rate
risk and foreign currency exchange risk.
The value of CPA(R):12's real estate is subject to fluctuations based on changes
in interest and foreign currency exchange rates, local and regional economic
conditions and changes in the creditworthiness of lessees. These factors may
affect CPA(R):12's ability to refinance its debt when balloon payments are
scheduled.
CPA(R):12 owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuation based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of March 31,
2004 the interests in CCMT had a fair value approximately of $8,305,000.
CPA(R):12 also owns marketable equity securities of Proterion Corporation and
Sentry Technology Corporation which based on their quoted per share prices had a
fair value of approximately $336,000 as of March 31, 2004.
All of CPA(R):12's $182,751,597 long-term debt bears interest at fixed rates,
and the fair value of these instruments is affected by changes in market
interest rates. The following table presents principal cash flows based upon
expected maturity dates of the debt obligations and the related weighted-average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate on the fixed rate debt as of March 31, 2004 ranged from 5.15% to 8.75%.
(in thousands) 2004 2005 2006 2007 2008 Thereafter Total Fair Value
------ ------- ------- ------- ------- ---------- -------- ----------
Fixed rate debt $4,499 $10,447 $11,539 $24,546 $18,049 $113,672 $182,752 $187,364
Average interest rate 7.37% 7.70% 7.73% 7.57% 6.72% 7.54%
A change in interest rates of 1% would not have an effect on annual interest
expense as CPA(R):12 has no variable rate debt.
CPA(R):12 is subject to foreign currency exchange risk from the effects of
exchange rate movements of foreign currencies and this may affect future costs
and cash flows; however, exchange rate movements to date have not had a
significant effect on CPA(R):12's financial position or results of operations.
In addition, the underlying properties are financed with fixed-rate mortgage
debt in the local currency so that changes in exchange rates that would increase
or decrease rental revenues from the properties would be partially offset by
exchange rate changes on debt service. CPA(R):12 has not entered into any
foreign currency forward exchange contracts to hedge the effects of adverse
fluctuations in foreign currency exchange.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
March 31, 2004.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in Rule 13a-14(c) promulgated under the Exchange Act) are sufficiently
effective to ensure that the information required to be disclosed by the Company
in the reports it files under the Exchange Act is recorded, processed,
summarized and reported with adequate timeliness.
13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART II
Item 2. - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
(c) For the quarter ended March 31, 2004, 73,596 shares were issued to the
Advisor as consideration for performance fees and 46,431 shares were
issued pursuant to the Company's Stock Purchase and Dividend
Reinvestment Plan. Shares were issued at per share amounts which
ranged from $10.60 to $11.70.
(e) Issuer Purchases of Equity Securities
Total Number of Shares
Purchased as Part of
Total Number of Average Price Publicly Announced
Period Shares Purchased Paid Per Share Plans or Programs(1)
------ ---------------- -------------- ----------------------
January 1, 2004 - January 31, 2004 47,825 $10.07 N/A
February 1, 2004 - February 29, 2004 -- -- N/A
March 1, 2004 - March 31, 2004 1,200 10.07 N/A
------
Total 49,025
======
- ----------------
(1) All shares were purchased pursuant to the Company's Redemption Plan. The
maximum amount of shares purchasable in any period depends on the
availability of funds generated by the Dividend Reinvestment Plan and other
factors at the discretion of the Company's Board of Directors.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2004, no matters were submitted to a vote of
Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2004, CPA(R):12 furnished a report
on Form 8-K on March 25, 2004 under Item 9 with respect to the
Company's dividend.
14
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
5/6/2004 By: /s/ John J. Park
-------- -----------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
5/6/2004 By: /s/ Claude Fernandez
-------- -----------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
15