<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO 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, A MARYLAND CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 13-3726306
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
(212) 492-1100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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.
/X/ Yes / / No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
/ / Yes / / No
28,560,060 shares of common stock; $.001 Par Value
outstanding at November 9, 1998
<PAGE> 2
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
INDEX
Page No.
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 1997
and September 30, 1998 2
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 1997 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 1997 and 1998 3
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 1997 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 11
Item 6. - Exhibits and Reports on Form 8-K 11
Signatures 12
* The summarized financial information contained herein is unaudited; however,
in the opinion of management, all adjustments necessary for a fair presentation
of such financial information have been included.
-1-
<PAGE> 3
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land and buildings,
net of accumulated depreciation of
$4,360,196 at December 31, 1997 and
$8,137,433 at September 30, 1998 $ 222,654,204 $ 266,744,552
Net investment in direct financing leases 40,966,665 41,066,695
Equity investments 16,635,180 17,006,907
Cash and cash equivalents 72,423,221 50,225,947
Other assets 6,013,856 6,295,429
------------- -------------
Total assets $ 358,693,126 $ 381,339,530
============= =============
LIABILITIES:
Limited recourse mortgage notes payable $ 88,893,692 $ 105,405,704
Accrued interest payable 650,800 838,685
Accounts payable to affiliates 3,430,059 1,637,473
Accounts payable and accrued expenses 259,189 183,000
Prepaid rental income and security deposits 5,416,573 5,116,312
Dividend payable 5,801,107
Deferred acquisition fees payable to an affiliate 6,469,146 7,016,013
------------- -------------
Total liabilities 105,119,459 125,998,294
------------- -------------
Minority interest 11,101,219
-------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized,
40,000,000 shares; issued and
outstanding 28,334,451 and 28,673,861 shares at
December 31, 1997 and September 30, 1998 28,334 28,674
Additional paid-in capital 253,835,934 257,229,695
Unrealized appreciation, marketable securities 3,031,300 1,735,990
Dividends in excess of accumulated earnings (2,768,966) (13,790,509)
------------- -------------
254,126,602 245,203,850
Less, common stock in treasury, at cost,
68,043 and 113,801 shares at December 31, 1997
and September 30, 1998 (552,935) (963,833)
------------- -------------
Total shareholders' equity 253,573,667 244,240,017
------------- -------------
Total liabilities and shareholders' equity $ 358,693,126 $ 381,339,530
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date.
-2-
<PAGE> 4
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 4,413,460 $ 6,675,557 $ 11,218,483 $ 20,025,154
Interest from direct
financing leases 1,228,559 1,236,193 3,737,247 3,703,066
Other interest income 1,161,081 668,327 2,463,066 1,954,624
------------ ------------ ------------ ------------
6,803,100 8,580,077 17,418,796 25,682,844
------------ ------------ ------------ ------------
Expenses:
Interest 1,769,898 2,330,675 4,539,981 6,271,101
Depreciation 815,169 1,319,643 2,012,502 3,777,237
General and administrative 887,376 440,893 1,833,737 1,556,873
Property expenses 650,064 1,091,109 1,829,429 3,013,378
Amortization 25,895 33,634 59,473 78,882
------------ ------------ ------------ ------------
4,148,402 5,215,954 10,275,122 14,697,471
------------ ------------ ------------ ------------
Income before income
from equity investments
and extraordinary item 2,654,698 3,364,123 7,143,674 10,985,373
Income from equity investments 527,279 540,574 1,557,141 1,612,559
------------ ------------ ------------ ------------
Income before extraordinary
item 3,181,977 3,904,697 8,700,815 12,597,932
Extraordinary loss on
extinguishment of debt (379,247)
------------ ------------ ------------ ------------
Net income $ 3,181,977 $ 3,904,697 $ 8,700,815 $ 12,218,685
============ ============ ============ ============
Basic and diluted earnings per
common share before
extraordinary item $ .13 $ .14 $ .41 $ .44
Extraordinary item (.01)
------------ ------------ ------------ ------------
Basic and diluted earnings per share $ .13 $ .14 $ .41 $ .43
============ ============ ============ ============
Weighted average shares
outstanding - basic and diluted 24,395,776 28,523,460 21,286,481 28,366,209
============ ============ ============ ============
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income $ 3,181,977 $ 3,904,697 $ 8,700,815 $ 12,218,685
Other comprehensive income:
Change in unrealized
appreciation, marketable
securities during the period 3,715,788 (557,857) 3,715,788 (1,295,310)
------------ ------------ ------------ ------------
Comprehensive income $ 6,897,765 $ 3,346,840 $ 12,416,603 $ 10,923,375
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE> 5
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,700,815 $ 12,218,685
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,071,975 3,856,119
Straight-line rent adjustments and other
noncash rent adjustments (194,977) (807,754)
Income from equity investments in excess
of distributions received (439,527) (371,727)
Extraordinary charge on extinguishment of debt 379,247
Provision for uncollected rent 277,962
Change in operating assets and liabilities, net 2,440,354 517,137
------------- -------------
Net cash provided by operating activities 12,578,640 16,069,669
------------- -------------
Cash flows from investing activities:
Purchases of real estate and additional capitalized costs (101,667,015) (47,148,480)
------------- -------------
Net cash used in investing activities (101,667,015) (47,148,480)
------------- -------------
Cash flows from financing activities:
Proceeds from mortgages 42,711,509 26,000,000
Prepayment of mortgage payable (2,796,000) (7,957,949)
Payments on mortgage principal (1,204,680) (1,530,039)
Proceeds from stock issuance, net of costs 115,238,459
Capital contributions from minority interest 11,101,219
Deferred financing costs (403,591) (502,428)
Dividends paid (10,150,925) (17,439,121)
Payment made on extinguishment of debt (379,247)
Purchase of treasury stock (252,147) (410,898)
------------- -------------
Net cash provided by financing activities 143,142,625 8,881,537
------------- -------------
Net increase (decrease) in cash and cash equivalents 54,054,250 (22,197,274)
Cash and cash equivalents, beginning of period 50,893,314 72,423,221
------------- -------------
Cash and cash equivalents, end of period $ 104,947,564 $ 50,225,947
============= =============
Supplemental disclosure of cash flows information:
Interest paid $ 4,338,900 $ 6,083,216
============= =============
</TABLE>
Noncash operating and financing activities:
During 1998, the Company issued 339,410 shares of common stock to the
Advisor in settlement of $3,394,101 of performance fees, a portion of which had
been voluntarily deferred by the Advisor.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE> 6
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting
principles 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. For further information
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Note 2. Transactions with Related Parties:
Pursuant to the advisory agreement, the Advisor performs certain advisory and
administrative services for the Company. For the three-month and nine-month
periods ended September 30, 1997, the Company incurred asset management fees of
$313,973 and $839,059, respectively, with performance fees in like amount.
General and administrative expense reimbursements for the three-month and
nine-month periods ended September 30, 1997 were $504,653 and $1,005,537,
respectively. For the three-month and nine-month periods ended September 30,
1998, the Company incurred asset management fees of $438,648 and $1,277,609,
respectively, with performance fees in like amount. General and administrative
expense reimbursements for the three-month and nine-month periods ended
September 30, 1998 were $176,212 and $495,217, respectively.
On June 10, 1998, the Company's shareholders approved a proposal to allow the
Company, subject to the Advisor's consent, to pay fees to the Advisor in Company
common stock rather than cash. Since the approval, the Company has issued
339,410 shares of common stock to the Advisor in settlement of accrued
performance fees of $3,394,101. The collection of a portion of the performance
fees had previously been voluntarily deferred by the Advisor. The stock is
subject to certain restrictions and will vest ratably over a five year period.
For purposes of determining the number of shares to be issued, the Company used
the $10.00 per share price used in connection with its registered offering of
shares of common stock for sale. Pursuant to the prospectus of the Company
relating to the shares, no appraisal of the fair value of the Company's assets
is scheduled until December 31, 1998. Determination of a per share value for
shares issued after that date will be based on the appraised fair value.
The Company, in conjunction with certain affiliates, is a participant in a cost
sharing agreement for the purpose of renting and occupying office space. Under
the agreement, the Company pays its proportionate share of rent and other costs
of occupancy. Net expenses incurred for the nine-months ended September 30, 1997
and 1998 were $47,951 and $91,591, respectively.
-5-
<PAGE> 7
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 3. Industry Segment Information:
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 below for the nine-month periods ended September 30, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Per Statements of Income:
Rental income $11,218,483 $20,025,154
Interest from direct financing leases 3,737,247 3,703,066
Adjustment:
Share of leasing revenue from equity
investments 3,317,590 3,313,595
----------- -----------
$18,273,320 $27,041,815
=========== ===========
</TABLE>
For the nine-month periods ended September 30, 1997 and 1998, the Company earned
its leasing revenues on its investments from the following lease obligors:
<TABLE>
<CAPTION>
1997 % 1998 %
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Etec Systems, Inc. $ 1,155,173 6% $ 2,243,918 8%
Perry Graphic Communications, Inc.
and Judd's Incorporated 1,643,675 6
Scott Companies Inc. 1,340,856 7 1,455,638 5
Spectrian Corporation 1,443,750 8 1,443,750 5
Best Buy Co., Inc. (a) 1,345,934 7 1,341,939 5
Westell Technologies, Inc. 4,790 1,311,188 5
QMS, Inc. 1,031,753 6 1,267,031 4
Telos Corporation 1,085,250 6 1,085,250 4
Q Clubs, Inc. 1,040,221 6 1,052,206 4
The Upper Deck Company (a) 989,906 5 989,906 4
Gensia, Inc. (a) 981,750 5 981,750 4
Applied Bioscience International, Inc. 976,500 5 976,500 4
Del Monte Corporation 964,688 5 964,688 4
The Bon-Ton Stores, Inc. 603,606 3 953,063 4
GDE Systems, Inc. 19,226 946,523 4
Career Education Corporation 912,156 3
Silgan Containers Corporation 267,960 2 847,202 3
Lanxide Corporation 772,500 4 772,500 3
Garden Ridge Corporation 746,823 4 746,823 3
Big V Holding Corp. 608,948 3 620,202 2
Rheometric Scientific, Inc. 658,249 4 612,814 2
The Garden Companies, Inc. 612,300 3 612,300 2
Celadon Group, Inc. 525,000 3 536,833 2
Vermont Teddy Bear Co., Inc. 133,663 1 489,298 2
Childtime Childcare, Inc. 136,426 1 448,535 2
Pagg Corporation 137,129 1 442,500 2
NutraMax Products, Inc. 431,252 2
Knogo North America, Inc. 393,000 3 393,000 1
Wal-Mart Stores, Inc. 297,919 2 297,919 1
Sandwich Bancorp, Inc. 121,660
Texas Freezer Company, Inc. 99,796
----------- ----------- ----------- -----------
$18,273,320 100% $27,041,815 100%
=========== =========== =========== ===========
</TABLE>
(a) Represents the Company's proportionate share of lease revenues attributable
to its equity investment.
-6-
<PAGE> 8
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Dividends:
Dividends paid to shareholders during the nine months ended September 30, 1998
are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Total Paid Per Share
<S> <C> <C>
December 31, 1997 $5,719,178 $ 0.2023
========== ==========
March 31, 1998 $5,720,883 $ 0.2025
========== ==========
June 30, 1998 $5,999,060 $ 0.2027
========== ==========
</TABLE>
A dividend of .2029 per share was declared on September 24, 1998 and paid in
October 1998 for the quarter ended September 30, 1998, and has been recorded in
the accompanying condensed consolidated financial statements as dividends
payable.
Note 6. Equity Investments:
The Company holds a 37% interest in BB Property Company ("BB Property"), a
general partnership that net leases 17 retail stores to Best Buy Co., Inc., a
50% interest in Gena Property Company ("Gena"), a general partnership that net
leases two office buildings to Gensia, Inc. and a 50% interest in Cards Limited
Liability Company ("Cards LLC"), a limited liability company that net leases
office and manufacturing facilities to The Upper Deck Company. Summarized
financial information of Gena, BB Property and Cards LLC is as follows:
(in thousands)
<TABLE>
<CAPTION>
Gena BB Property Cards LLC
------------------------------------ ------------------------------------ ------------------------------------
December 31, 1997 September 30, 1998 December 31, 1997 September 30, 1998 December 31, 1997 September 30, 1998
----------------- ------------------ ----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Assets $21,710 $21,020 $45,626 $45,866 $26,729 $26,596
Liabilities 11,671 10,752 29,994 29,358 15,511 15,293
Partner's capital 10,039 10,268 15,632 16,508 11,218 11,303
</TABLE>
<TABLE>
<CAPTION>
For The Nine Months Ended
-------------------------
September 30, 1997 September 30, 1998
--------------------------------------------- ---------------------------------------------
Gena BB Property Cards LLC Gena BB Property Cards LLC
---- ----------- --------- ---- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,964 $ 3,646 $ 1,965 $ 1,964 $ 3,627 $ 1,980
Interest (733) (2,091) (942) (659) (1,987) (921)
Depreciation (346) (346)
Other expenses (5) (6) 4 (2) (4) (2)
------- ------- ------- ------- ------- -------
Net income $ 880 $ 1,549 $ 1,027 $ 957 $ 1,636 $ 1,057
======= ======= ======= ======= ======= =======
</TABLE>
-7-
<PAGE> 9
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Company's condensed consolidated financial statements and notes thereto as of
September 30, 1998 included in this quarterly report and the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. This quarterly report
contains forward looking statements. Such statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievement of the Company to be materially different from the
results of operations or plan expressed or implied by such forward looking
statements. Accordingly, such information should not be regarded as
representations by the Company that the results or conditions described in such
statements or the objectives and plans of the Company will be achieved.
RESULTS OF OPERATIONS:
Net income for the three-month and nine-month periods ended September
30,1998 reflects increases of $723,000 and $3,518,000, respectively, as compared
with the three-month and nine-month periods ended September 30,1997. Excluding
the effect of an extraordinary charge on the extinguishment of debt that
resulted from a prepayment premium incurred in connection with the satisfaction
of a mortgage loan, the increase in income for the comparable nine-month periods
would have reflected an increase of $3,897,000. The increases in net income were
due to an increase in lease revenues (rental income and interest from direct
financing leases) and a decrease in general and administrative expenses, and
were partially offset by increases in interest, depreciation and property
expenses, and a decrease in other interest income. The increases in lease
revenues and interest, depreciation and property expenses were due to the
increase in the Company's real estate portfolio and related mortgage balances
for the comparable periods. Between September 30,1997 and September 30,1998, the
Company's investment in real estate increased from $230,000,000 to $316,000,000
and mortgage balances increased from $85,000,000 to $105,000,000. Other interest
income has decreased as cash available for investment has been used for property
purchases and additional funding of the Company's build-to-suit commitments. The
increase in property expenses was due to an increase in asset management and
performance fees, which are determined solely by the value of real estate owned
as well as a noncash charge of $278,000 to strengthen the Company's reserve for
uncollected rents. The decrease in general and administrative expenses reflected
a decrease in administrative reimbursements.
Under generally accepted accounting principles, rents received during
the construction period on build-to-suit projects are not recognized as lease
revenues nor included in cash flow from operations. Such rents are recorded as a
reduction in the cost basis of the build-to-suit projects. Only as the projects
are completed are the rents from these projects recognized as revenues in the
results of operations. The Company currently has funded costs in excess of
$22,603,000 on build-to-suit projects being constructed for Etec Systems, Inc.,
International Management Consulting, Inc., Balanced Care Corporation and Randall
International, Inc. These projects are scheduled for completion between November
1998 and June 1999. The Company's annual rents from International Management
Consulting, Balanced Care and Randall are expected to amount to approximately
$1,925,000 assuming that all committed project costs are needed to complete
construction. Approximate remaining costs for all of the projects other than
Etec are expected to total $9,907,000. The costs of the new facility being
constructed at the Etec property are estimated to amount to $52,356,000 of which
$30,000,000 will be financed by a limited recourse mortgage loan for which a
commitment has been received. Corporate Property Associates 14 Incorporated, an
affiliate, will own a 49.99% interest in this project. Based on a projected
equity contribution of $11,178,000, the Company's share of annual cash flow
(rental income less mortgage debt service) is expected to be $1,243,000. In July
1998, Texas Freezer Company, Inc. took occupancy of a building which the Company
had constructed as a build-to-suit project. Annual rent under the Texas Freezer
lease is $911,000, and cash flow and revenue from Texas Freezer will now be
reflected in lease revenues and operating cash flow.
-8-
<PAGE> 10
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
FINANCIAL CONDITION
In September 1997, the Company completed a second offering of common
stock in which it raised $201,198,000. The Company has not fully invested the
net proceeds from the offering, and is using its uninvested funds to complete
its build-to-suit commitments and for additional purchases of real estate. As of
November 6, 1998, the Company had $38,000,000 of uninvested cash available for
investment. The Company also has significant borrowing capacity because many of
its properties are unleveraged. The Company intends to place limited recourse
mortgage loans on many of the unleveraged properties and to use the proceeds
from the borrowings to purchase additional properties.
Since December 31, 1997, the Company's cash balances have decreased by
$22,197,000. The Company has used $47,148,000 for investing in new properties
and additional capital costs on its committed projects. The funds invested were
made available from the Company's cash balances, funds received from two
mortgage financings in 1998 and $11,101,000 received from Corporate Property
Associates 14 for its minority interest in the Etec project. Of the $26,000,000
received in 1998 from mortgage financings, $7,958,000 was used to pay off an
existing mortgage loan on the Etec property.
Cash flow from operations of $16,070,000 which excludes rents received
during the construction periods on build-to-suit projects, was not sufficient to
fund fully dividends paid of $17,439,000 and scheduled mortgage principal
installments of $1,530,000. The Company believes that its ability to meet its
objective of fully funding its dividend from operating cash flow will be
realized as its build-to-suit projects are completed and rents at those
properties are included in cash flow from operations. The Company has devoted a
substantial portion of its resources to build-to-suit projects as it believes
that they should provide a much better return on investment than many other
opportunities being evaluated by the Advisor's acquisitions team. The Company
places its emphasis on selecting transactions that meet long-term objectives
rather than investing available funds as quickly as possible in properties that
will increase operating cash flow currently but do not meet the criteria of the
investment committee of the Advisor and the Company's Board of Directors.
In June 1998, the shareholders of the Company approved a proposal to
amend the Company's Advisory Agreement to allow the Company, with the consent of
the Advisor, to pay asset management and performance fees in common stock rather
than cash. As a result of this amendment to the Advisory Agreement, the Company
was able to convert liabilities for unpaid performance fees of approximately
$3,394,000 to equity. By issuing 339,410 shares rather than paying fees in cash,
the Company's liquidity has been enhanced. The current issuance of shares and
any future issuance of shares to pay fees will reduce the cash required by the
Company to pay expenses, strengthen the Company's balance sheet and increase the
equity ownership of the Advisor with the effect of aligning more strongly the
interests of the Advisor and shareholders of the Company. With such issuance,
the Advisor's ownership in the Company has increased to more than 1%.
The so-called "Year 2000 issue" is the name that has been given to the
series of problems that have resulted or may result from computer programs
having been written using two digits rather than four to define a year. For
example, any program that has time-software may recognize a date using "00" as
the year 1900 rather than 2000. This shortcoming could result in the failure of
major systems or miscalculations causing major disruptions to business
operations. The Company has no computer systems of its own, but is dependent
upon the systems maintained by an affiliate of its Advisor and certain other
third parties including its bank and transfer agent.
The Company and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. In 1998, the Company, its Advisor, and
affiliates commenced an assessment of their local area network of personal
computers and related equipment and are in the process of replacing or upgrading
the equipment that has been identified as not being Year 2000 compliant. The
program is expected to be completed in the first or second quarter of 1999. The
Company and its affiliates have also engaged outside consultants experienced in
detecting and addressing Year 2000 issues, and they will continue to research
and test the affiliate's applications and systems.
-9-
<PAGE> 11
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
FINANCIAL CONDITION (continued):
At the same time, the Company, its Advisor, and affiliates are
evaluating all of their applications software, all of which are commercial "off
the shelf" programs that have not been customized. During 1998, the Company
commenced a project to select a comprehensive integrated real estate accounting
and asset management software package to replace its existing applications. A
commercial Windows-based integrated accounting and asset management based
application is being tested and is scheduled to be installed during the second
or third quarter of 1999. This software has been designed to use four digits to
define a year. Because the Company's primary operations consist of investing in
and receiving rents on long-term net leases of real estate, while the failure of
the Advisor and its affiliates to correct fully Year 2000 issues could disrupt
its administrative operations, the resulting disruptions would not likely have a
material impact on the Company's results of operations, financial condition or
liquidity. Contingency plans to address potential disruptions are in the process
of being developed. The Company's share of costs associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. The Company's share of the estimated total
cost of the Year 2000 project is expected to be approximately $105,000.
Although the Company believes that it will address its internal Year
2000 issues in a timely manner, there is a risk that the inability of
third-party suppliers and lessees to meet Year 2000 readiness issues could have
an adverse impact on the Company. The Company and its affiliates have identified
their critical suppliers and are requiring that these suppliers communicate
their plans and progress in addressing Year 2000 readiness. The most critical
processes provided by third-party suppliers are the Company's bank and transfer
agent. The Company's operations may be significantly affected if such providers
are ineffective or untimely in addressing Year 2000 issues.
The Company contacted each of its lessees regarding Year 2000 readiness
and has emphasized the need to address Year 2000 issues. Generally, lessees are
contractually required to maintain their leased properties in good working order
and to make necessary alterations, foreseen or unforeseen, to meet their
contractual obligations. Because of those obligations, the Company believes that
the risks and costs of upgrading systems related to operations of the buildings
and that contain technology affected by Year 2000 issues will generally be
absorbed by lessees rather than the Company. The major risk to the Company is
that Year 2000 issues have such an adverse effect on the financial condition of
a lessee that its ability to meet its lease obligations, including the timely
payment of rent, is impaired. In such an event, the Company may ultimately incur
the costs for Year 2000 readiness at the affected properties. The potential
materiality of any impact is not known at this time.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
accounting standards for the way that public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products, geographic area and major customers. The statement is effective
for financial periods beginning after December 15, 1997, however, SFAS No. 131
does not need to be applied to interim financial statements in 1998. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for all quarters of fiscal years beginning after June 15, 1999. The Company is
currently evaluating the impact, if any, of SFAS No. 131 and SFAS No. 133.
-10-
<PAGE> 12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 1998 no matters were submitted
to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Pursuant to Rule 701 of Regulation S-K, the use of proceeds from the
Company's offering of common stock which commenced February 2, 1996 is
as follows:
<TABLE>
<S> <C>
Shares registered: 20,300,000
Aggregate price of offering amount registered: $203,000,000
Shares sold: 20,198,459
Aggregated offering price of amount sold: $201,984,590
Direct or indirect payments to directors, officers, general
partners of the issuer or their associates, to persons
owning ten percent or more of any class of equity
securities of the issuer and to affiliates of
the issuer: $ 5,235,503
Direct or indirect payments to others: $ 10,521,232
Net offering proceeds to the issuer after
deducting expenses: $186,227,855
Purchases of real estate: $149,502,752
Working capital reserves: $ 2,019,846
Temporary investments in cash and cash
equivalents: $ 34,705,257
</TABLE>
(b) Reports on Form 8-K:
During the quarter ended September 30, 1998 the Company was not
required to file any report on Form 8-K.
-11-
<PAGE> 13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
AND SUBSIDIARIES
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
AND SUBSIDIARIES
11/9/98 By: /s/ Steven M. Berzin
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/9/98 By: /s/ Claude Fernandez
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCES TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 50,225,947
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,225,947
<PP&E> 315,948,680
<DEPRECIATION> 8,137,433
<TOTAL-ASSETS> 381,339,530
<CURRENT-LIABILITIES> 13,576,577
<BONDS> 105,405,704
0
0
<COMMON> 28,674
<OTHER-SE> 244,211,343
<TOTAL-LIABILITY-AND-EQUITY> 381,339,530
<SALES> 0
<TOTAL-REVENUES> 25,682,844
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,426,370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,271,101
<INCOME-PRETAX> 12,597,932
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,597,932
<DISCONTINUED> 0
<EXTRAORDINARY> (379,247)
<CHANGES> 0
<NET-INCOME> 12,218,685
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
