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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended JUNE 30, 2002
of
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CPA(R):15
A MARYLAND Corporation
IRS Employer Identification No. 52-2298116
SEC File Number 333-58854
50 ROCKEFELLER PLAZA,
NEW YORK, NEW YORK 10020
(212) 492-1100
CPA(R):15 has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CPA(R):15 HAS NO SECURITIES registered on any exchanges.
CPA(R):15 does not have any Securities registered pursuant to Section 12(b) of
the Act.
CPA(R):15 (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.
CPA(R):15 has no active market for common stock at August 13, 2002.
CPA(R):15 has 20,396,984 shares of common stock, $.001 Par Value outstanding at
August 13, 2002.
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, December 31, 2001
and June 30, 2002 2
Condensed Consolidated Statements of Income for the three and six months
ended June 30, 2002 3
Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 2002 4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 3. - Quantitative and Qualitative Disclosures about Market Risk 14
PART II - Other Information
Item 2(d). - Use of Proceeds of Registered Offering 15
Item 4. - Submission of Matters to a Vote of Security Holders 15
Item 6. - Exhibits and Reports on Form 8-K 15
Signatures 16
* 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-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 June 30, 2002
----------------- -------------
(Note) (Unaudited)
ASSETS:
Land and buildings, net of accumulated depreciation of $170,100 at
June 30, 2002 $ 92,723,871
Net investment in direct financing leases 20,970,509
Equity investments $ 128,995 11,142,426
Cash and cash equivalents 188,207 73,514,771
Deferred offering costs 1,888,548 3,240,249
Other assets -- 3,248,237
------------ -------------
Total assets $ 2,205,750 $ 204,840,063
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 42,017,435
Accrued interest 79,916
Due to affiliates $ 2,039,774 3,387,443
Accounts payable and accrued expenses 34,455 366,271
Prepaid rental income -- 841,242
Deferred acquisition fees payable to affiliate -- 2,776,348
Dividends payable -- 1,861,295
------------ -------------
Total liabilities 2,074,229 51,329,950
------------ -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized 120,000,000 shares;
20,000 and 17,321,954 shares issued and outstanding at
December 31, 2001 and June 30, 2002 20 17,322
Additional paid-in capital 199,980 155,058,594
Dividends in excess of accumulated earnings (68,479) (1,565,803)
------------ -------------
Total shareholders' equity 131,521 153,510,113
------------ -------------
Total liabilities and shareholders' equity $ 2,205,750 $ 204,840,063
============ =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the
audited consolidated financial statements at that date.
-2-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONDENSED CONSOLIDATED STATEMENT of INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2002 June 30, 2002
------------- -------------
Revenues:
Rental income $ 635,312 $ 635,312
Interest income from direct financing leases 166,885 166,885
Interest income 380,575 497,212
----------- ----------
1,182,772 1,299,409
----------- ----------
Expenses:
Interest 254,002 256,502
Depreciation 170,100 170,100
General and administrative 189,959 286,422
Property expenses 144,956 166,856
----------- ----------
759,017 879,880
----------- ----------
Income before income from equity investments 423,755 419,529
Income from equity investments 315,475 428,509
----------- ----------
Net income $ 739,230 $ 848,038
=========== ==========
Basic and diluted earnings per share $ .06 $ .11
=========== ==========
Weighted average shares outstanding - basic and diluted 12,593,382 7,926,966
=========== ==========
Note: The Company had no activity from the period from inception (February
26, 2001) to June 30, 2001.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONDENSED CONSOLIDATED STATEMENT of CASH FLOWS (UNAUDITED)
Six Months Ended
----------------
June 30, 2002
-------------
Cash flows from operating activities:
Net income $ 848,038
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of financing costs 170,422
Equity income in excess of distributions received (6,048)
Straight-line rent adjustments (19,691)
Increase in other assets (363,404)
Increase in accrued interest 79,916
Increase in accounts payable and accrued expenses 74,295
Increase in due to affiliates (a) 124,608
Increase in prepaid rent and security deposits 841,242
-------------
Net cash provided by operating activities 1,749,378
-------------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 326,939
Acquisitions of real estate and equity investments and other
capitalized costs (b) (122,531,404)
-------------
Net cash used in investing activities (122,204,465)
-------------
Cash flows from financing activities:
Proceeds from issuance of stock, net of costs of raising capital 154,875,916
Dividends paid (484,067)
Proceeds from mortgages (c) 39,491,862
Mortgage principal payments (5,435)
Deferred financing costs and mortgage deposits (96,625)
-------------
Net cash provided by financing activities 193,781,651
-------------
Net increase in cash and cash equivalents 73,326,564
Cash and cash equivalents, beginning of period 188,207
-------------
Cash and cash equivalents, end of period $ 73,514,771
=============
Note: The Company had no activity from the period from inception (February
26, 2001) to June 30, 2001.
(a) Increase in due to affiliates excludes amounts which relate to
the raising of capital (financing activities) pursuant to the
Company's public offering. At June 30, 2002, the amount due to
the Company's Advisor, Carey Asset Management Corp., was
$3,240,249.
(b) Includes payment of $128,640 that was due to affiliates as of
December 31, 2001 related to purchase of initial interests in
three equity investments.
(c) Net of $2,531,008 held by lenders to fund escrow accounts.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation:
The condensed consolidated financial statements include the accounts of
Corporate Property Associates 15 Incorporated and its wholly owned subsidiaries
(collectively, the "Company"). All material inter-entity transactions have been
eliminated. All entities in which the Company has a controlling interest are
consolidated in the accompanying condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements of 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. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the results of the interim period presented
have been included. The results of operations for the interim period are not
necessarily indicative of results for the full year. For further information,
refer to the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the period ended December 31, 2001.
Note 2. Organization and Offering:
Corporate Property Associates 15 Incorporated, a Maryland corporation (the
"Company"), was formed on February 26, 2001 under the General Corporation Law of
Maryland for the purpose of engaging in the business of investing in and owning
property net leased to creditworthy corporations and other creditworthy
entities. Subject to certain restrictions and limitations, the business of the
Company is managed by Carey Asset Management Corp. (the "Advisor"), a
wholly-owned subsidiary of W. P. Carey & Co. LLC.
On April 2, 2001, the Advisor purchased 20,000 shares of common stock for
$200,000 as the initial shareholder of the Company.
A maximum of 40,000,000 shares of common stock are being offered to the public
(the "Offering") on a "best efforts" basis by Carey Financial Corporation
("Carey Financial"), an affiliate of the Advisor, and selected other dealers at
a price of $10 per share. During the six months ended June 30, 2002, the Company
issued 17,301,954 shares ($173,019,540) and has issued an additional 5,457,745
shares ($54,577,453) since June 30, 2002. The Company is investing the net
proceeds of the Offering in properties, as described in the prospectus of the
Company (the "Prospectus"). The Company has also registered up to 10,000,000
shares for a dividend reinvestment plan.
Note 3. Transactions with Related Parties:
In connection with performing management 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. The performance fee is subordinated to the Preferred
Return, a cumulative annual non-compounded dividend return of 6%. As of June 30,
2002, the Preferred Return has been met. 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 certain general and
administrative expenses, primarily the cost of personnel needed to provide
administrative services necessary to the operation of the Company. For the
three-month and six-month periods ended June 30, 2002, the Company incurred
asset management fees of $69,570 and $80,520, respectively, with performance
fees in like amounts. For both the three-month and six-month periods ended June
30, 2002, the Company incurred general and administrative reimbursements of
$49,494.
Fees are payable to the Advisor for services provided 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 equal annual
installments over no less than four years following the first anniversary of the
date a property is purchased. For transactions that were completed during the
six months ended June 30, 2002, current fees were $3,470,435.
-5-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceed the 2%/25% Guidelines (the greater of
2% of Average Invested Assets or 25% of Net Income) as defined in 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. If the
Independent Directors find that such expenses were justified based on any
unusual and nonrecurring factors which they deem sufficient, the Advisor may be
reimbursed in future years for the full amount or any portion of such excess
expenses, but only the extent that such reimbursement would not cause the
Company's operating expenses to exceed the 2%/25% Guidelines in any such year.
Note 4. Commitments and Contingencies:
The Company is liable for certain expenses of the Offering described in the
Prospectus, which include filing, legal, accounting, printing and escrow fees,
which are to be deducted from the gross proceeds of the Offering. The Company is
reimbursing Carey Financial for expenses (including fees and expenses of its
counsel) and for the costs of any sales and information meetings of Carey
Financial's employees relating to the Offering. The total underwriting
compensation to Carey Financial and other dealers in connection with the
Offering shall not exceed 10% of gross proceeds of the Offering. The Advisor has
agreed to be responsible for the payment of (i) organization and offering
expenses (excluding selling commissions to Carey Financial with respect to
Shares held by selected dealers) which exceed 4% of the gross proceeds of the
offering and (ii) organization and offering expenses (including selling
commissions, fees and fees paid and expenses reimbursed to selected dealers)
which exceed 15% of the gross proceeds of the Offering. Such costs paid by
Advisor totaled $6,333,089 through June 30, 2002, of which the Company has
reimbursed $3,092,840.
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 below for the six-month period ended June 30, 2002 are as
follows:
2002
----------
Per Statements of Income:
Rental income from operating leases $ 635,312
Interest from direct financing leases 166,885
Adjustment:
Share of leasing revenue from equity investments 1,017,242
----------
$1,819,439
==========
For the six-month period ended June 30, 2002, the Company earned its net leasing
revenues from its investments from the following lease obligors:
2002 %
---------- ---
Petsmart, Inc. (a) $ 830,351 46%
Tower Automotive, Inc. 523,528 29
Builders Firstsource, Inc. (a) 186,891 10
Racal Instruments, Inc. 160,266 9
IntegraColor, Ltd. 58,530 3
Fleming Companies, Inc. 45,900 2
Advantis Technologies, Inc. 13,973 1
---------- ---
$1,819,439 100%
========== ===
(a) Represents the Company's proportionate share of lease revenues from its
equity investments.
-6-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Equity Investments:
In 2001, the Company and Corporate Property Associates 14 Incorporated
("CPA(R):14"), an affiliate, formed two limited partnerships which entered into
net leases for 13 properties with Petsmart, Inc. ("Petsmart") and a limited
partnership which entered into a net lease for three properties with Builders
Firstsource, Inc. ("Builders First"). The Company initially purchased a 0.001%
interest in the Petsmart limited partnerships and a 1% interest in the Builders
First partnership at the time the properties were acquired. Under the limited
partnership agreements, the Company had an obligation to CPA(R):14 to increase
its ownership interests in the Petsmart and Builders First limited partnerships
to 30% and 40%, respectively, subject to certain conditions. On February 28,
2002, the Company paid $10,886,369 to CPA(R):14 to purchase the additional
ownership interests in the Petsmart and Builders First limited partnerships. The
interests in the three limited partnerships are accounted for under the equity
method as the Company's ownership interests are less than 50% and the Company
exercises significant influence.
Summarized financial information of the equity investees is as follows:
Limited partnerships leasing properties to Petsmart, Inc
in thousands) December 31, 2001 June 30, 2002
----------------- -------------
Assets (primarily real estate) $74,361 $74,394
Liabilities (primarily mortgage notes payable) 43,731 43,724
Partners' equity 30,630 30,670
Six Months Ended
June 30, 2002
-------------
Revenues (primarily rental revenues) $4,164
Expenses (primarily interest on mortgages and depreciation) 2,424
------
Net income $1,740
======
Limited partnership leasing properties to Builders Firstsource, Inc.
(in thousands) December 31, 2001 June 30, 2002
----------------- -------------
Assets (primarily real estate) $12,964 $12,909
Liabilities (primarily mortgage notes payable) 92 8,053
Partners' equity 12,872 4,856
Six Months Ended
June 30, 2002
-------------
Revenues (primarily rental revenues) $692
Expenses (primarily interest on mortgages and depreciation) 378
----
Net income $314
====
Note 7. Dividends Payable:
A dividend of $0.0016621 per share per day in the period from April 1, 2002
through June 30, 2002 was declared in June 2002 and paid in July 2002
($1,861,295).
-7-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Acquisitions of Real Estate:
On April 10, 2002, the Company purchased land and buildings in Auburn, Indiana;
Buffton, Ohio and Milan, Tennessee for $20,995,621 and entered into a master net
lease with Tower Automotive Products Company, Inc. and Tower Automotive Tool LLC
(collectively, "Tower"). The Tower lease obligations have been unconditionally
guaranteed by Tower Automotive, Inc., the parent company. The Tower lease has an
initial term of 18 years followed by two 10-year renewal options. Annual rent is
initially $2,355,875, with rent increases every three years based on a formula
indexed to increases in the Consumer Price Index ("CPI"). In connection with the
purchase, the Company obtained $12,022,870 of limited recourse mortgage
financing collateralized by the Tower properties and a lease assignment. The
loan provides for monthly payments of interest and principal of $88,052 at an
annual interest rate of 7.89% and based on a 30-year amortization schedule. The
loan matures in May 2012 at which time a balloon payment is scheduled.
On May 21, 2002, the Company purchased land and building in Irvine, California
for $13,455,497 and entered into a net lease with Racal Instruments, Inc. The
lease obligations have been unconditionally guaranteed by RIG Limited, the
parent company. The lease has an initial term of 20 years followed by five
five-year renewal options. Annual rent is initially $1,301,929 with stated
annual rent increases of 2.75%.
On June 14, 2002, the Company purchased land and three buildings in Mesquite,
Texas for $12,356,020 and entered into a master net lease with IntegraColor,
Ltd. The lease has an initial term of 20 years followed by two ten-year renewal
options, and grants the lessee the option to purchase the properties at the
expiration of any term at fair market value, as defined in the lease. Annual
rent is initially $1,256,700 with annual increases based on a formula indexed to
increases in the CPI.
On June 25, 2002, the Company purchased land and building in Alpharetta, Georgia
for $13,089,005 and entered into a net lease with Advantis Technologies, Inc.
The lease obligations have been unconditionally guaranteed by Rockwood
Specialties Group, which owns the lessee. The lease has an initial term of 15
years followed by two ten-year renewal options, and provides for initial annual
rent of $1,275,000 with annual increases after the third lease anniversary based
on a formula indexed to increases in the CPI, capped at 3%.
On June 28, 2002, the Company purchased land and building in Tulsa, Oklahoma for
$53,870,063 and entered into a net lease with Fleming Companies, Inc. The lease
has an initial term of 15 years followed by four five-year renewal options and
provides for initial annual rent of $5,508,000 with increases every five years
based on a formula indexed to increases in the CPI, capped at 9%. In connection
with the purchase, the Company obtained a limited recourse mortgage loan of
$30,000,000 collateralized by a mortgage and security agreement. The loan
provides for monthly payments of interest and principal of $208,948 at an annual
interest rate of 7.46% and based on a 30-year amortization schedule. The loan
matures in July 2012, at which time a balloon payment is scheduled.
Note 9. Subsequent Events:
On July 22, 2002, the Company purchased land and building in Miami, Florida for
$14,869,110 and entered into a net lease with Trends Clothing Corp. ("Trends").
In connection with the purchase, the Company assumed a limited recourse mortgage
loan of $8,630,041.
The lease has an initial term of 15 years with two ten-year renewal options and
provides Trends with an option to purchase the property at the end of the
initial term and each renewal term. Annual rent is $1,420,000 with increases
every three years based on a formula indexed to increases in the CPI.
The limited recourse mortgage loan, which is collateralized by a deed of trust
and lease assignment, provides for monthly payments of interest and principal of
$70,885 at an annual interest rate of 7.4% and based on a 226-month amortization
schedule. The loan is scheduled to mature in May 2016, at which time a balloon
payment is scheduled. The loan is not prepayable until July 2006 and may be
prepaid thereafter subject to a prepayment premium.
-8-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10. Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
the Company's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and are
amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on the Company's financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on the Company's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation 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 of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, the Company will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented. The Company has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Company does not expect SFAS No. 146 to have a material effect on the
Company's financial statements.
-9-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 15 Incorporated ("CPA(R):15") should
be read in conjunction with the financial statements and notes thereto as of
June 30, 2002 included in this quarterly report and CPA(R):15's Annual Report on
Form 10-K for the year ended December 31, 2001. This quarterly report contains
forward looking statements. 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):15. Such statements
included known and unknown risks, uncertainties and other factors that may cause
its actual results, performance or achievement to be materially different from
the results of operations or plans expressed or implied by such forward looking
statements. Accordingly, such information should not be regarded as
representations by us that the results or conditions described in such
statements or objectives and plans will be achieved. A description of
CPA(R):15's objectives, acquisition and financing strategies and factors that
may affect future operating results is detailed in Item 1 of the Annual Report
on Form 10-K.
CPA(R):15 was formed in 2001 and is using the proceeds from its $400,000,000
"best efforts" public offering along with limited recourse mortgage financing to
purchase properties and enter into long-term net leases with corporate lessees.
CPA(R):15 structures the net leases to place certain economic burdens of
ownership on these corporate lessees by requiring them to pay the costs of
maintenance and repair, insurance and real estate taxes. CPA(R):15 negotiates
leases that may provide for periodic rent increases that are stated or based on
increases in the Consumer Price Index ("CPI") or, for retail properties, provide
for additional rents based on sales in excess of a specified base amount.
CPA(R):15 is also acquiring interests in real estate through joint ventures with
affiliates who have similar investment objectives as CPA(R):15. These joint
ventures, which may be in the form of limited partnerships, limited liability
companies or tenancies-in-common, generally enter into net leases with single
corporate tenants.
CPA(R):15's objectives for its investors are to pay quarterly dividends at an
increasing rate, provide inflation-protected income through CPI-based rent
increases, own a diversified portfolio of net leased properties and increase the
equity in CPA(R):15's real estate portfolio by obtaining mortgage debt that
provides for scheduled principal payment installments.
As CPA(R):15 uses its offering proceeds to purchase investments in real estate,
it is adopting certain critical accounting policies that will be crucial to
understanding of its financial condition and results of operations. Such
policies include, but are not limited to the following:
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, CPA(R):15 will be required to assess its ability to
collect rent and other tenant-based receivables and determine an appropriate
charge for uncollected amounts. Because CPA(R):15's real estate operations will
have a limited number of lessees, Management believes that it will be necessary
to evaluate specific situations rather than solely use statistical methods.
CPA(R):15 will also use estimates and judgments when evaluating whether
long-lived assets are impaired. When events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, Management will
perform projections of undiscounted cash flows, and if such cash flows are
insufficient, the assets will be 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):15's investment objectives are to hold
properties on a long-term basis, holding period assumptions will likely range
from five to ten years. In its evaluations, CPA(R):15 will generally obtain
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 future cash flow projected in the evaluation of long-lived assets can
vary within a range of outcomes. CPA(R):15 will consider
-10-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the likelihood of possible outcomes in determining the best estimate of future
cash flows. Because CPA(R):15's properties are leased to single tenants,
CPA(R):15 may be more likely to incur significant writedowns when circumstances
deteriorate because of the possibility that a property will be vacated in its
entirety. This makes the risks faced by CPA(R):15 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.
CPA(R):15 will recognize rental income from sales overrides when reported by
lessees, that is, after the level of sales requiring a rental payment to
CPA(R):15 is reached.
CPA(R):15 and certain affiliates are investors in certain real estate ventures.
It is anticipated that additional properties will be purchased through real
estate ventures. These investments may be held through incorporated or
unincorporated jointly-held entities and certain investments are held directly
as tenants in common. Substantially all of these investments will represent
jointly purchased properties which are net leased to a single tenant and will be
structured to provide diversification and reduce concentration of a risk from a
single lessee for CPA(R):15 and the affiliate. The placement of an investment in
a jointly-held entity or tenancy in common requires the approval of CPA(R):15's
Independent Directors. All of the jointly held investments will be structured so
that CPA(R):15 and the affiliate contribute equity, receive distributions and
are allocated profit or loss in amounts that are proportional to their ownership
interests. The presentation of these jointly held investments and their related
results in the accompanying condensed consolidated financial statements is
determined based on factors such as controlling interest, significant influence
and whether each party has the ability to make independent decisions. Such
factors will determine whether such investments are consolidated in the accounts
of CPA(R):15, accounted for under the equity method or, for tenancies-in-common
meeting certain conditions, presented on a proportional basis. All of the
jointly-held investments are subject to contractual agreements.
CPA(R):15 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 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):15 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 noncancellable lease term. Different
estimates of residual value result in different implicit interest rates and
could possibly affect the financial reporting classification of leased assets.
Results of Operations
CPA(R):15 had no operations for the periods ended June 30, 2001. For the
three-month and six-month periods ended June 30, 2002, CPA(R):15 had net income
of $739,000 and $848,000, respectively. CPA(R):15 was formed in 2001 for the
purpose of investing in net lease real estate and did not make any substantial
investments in real estate until February 2002, when it exercised purchase
options to increase its equity investment in three limited partnerships owned
with an affiliate, Corporate Property Associates 14 Incorporated. In April 2002,
CPA(R):15 completed its first direct acquisition of real estate and as of June
30, 2002, CPA(R):15 has entered into leases with five lessees and anticipates
that it will use the proceeds of its "best efforts" public offering along with
limited recourse property-level mortgage financing to form a diversified
portfolio of real estate net leased to corporate tenants. Accordingly, the
results of operations for the periods ended June 30, 2002 are not expected to be
representative of future results. CPA(R):15 expects that its asset base will
increase substantially. As the asset base of the Company increases, general and
administrative, property and depreciation expenses will increase and interest
expense will increase as mortgage loans are placed on newly-acquired properties.
Interest income from uninvested cash currently represents a substantial portion
of CPA(R):15's revenues. As the proceeds of the offering are more fully invested
in real estate, interest income will decrease and is expected to be a minor
component of overall revenues. After CPA(R):15 is fully invested, CPA(R):15 will
maintain balances which it judges to be sufficient for meeting working capital
needs.
Based on current operations, CPA(R):15's share of its annual distributions from
the investments in the three limited partnerships will be $1,350,000 and will be
generated from the cash flow (rents less mortgage debt service) of the
underlying partnerships. Annual cash flow from CPA(R):15's leases with Tower
Automotive LLC, Racal Instruments,
-11-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Inc., IntegraColor Ltd., Advantis Technologies, Inc. and Fleming Companies, Inc.
is projected to be $8,134,000. Since June 30, 2002, CPA(R):15 has completed an
additional transaction which will provide annual cash flow of $569,000.
Financial Condition
A major objective of CPA(R):15 is to fully invest its funds in real estate in
order to generate sufficient cash flow from operations (including its equity
investments) to support its operating requirements and funding dividends to
shareholders at an increasing rate, as well as meeting scheduled mortgage debt
service. Cash flow from operations and equity investments of $2,076,000 was
sufficient to pay dividends of $484,000. When evaluating cash generated from
operations, Management includes cash provided from equity investments. Under
accounting principles generally accepted in the United States of America,
distributions from equity investments in excess of income from equity
investments are a return of capital and presented as an investing cash flow.
CPA(R):15 evaluates its ability to pay dividends to shareholders by using its
projections of cash flow (lease revenues, net of property-level debt service)
from both its directly-owned real estate and its equity investments.
CPA(R):15 used $122,531,000 to acquire properties currently net leased to five
lessees on a single-tenant basis and increase its ownership interests in the
Petsmart, Inc. and Builders Firstsource, Inc. limited partnerships. Since June
30, 2002, CPA(R):15 has used an additional $14,869,000 to acquire properties.
CPA(R):15 expects to use substantially all of the net proceeds of its offering
along with limited recourse mortgage debt to purchase ownership interests in
real estate either directly or with affiliates. To the extent that the entire
offering is subscribed, acquisition activity can be expected to continue for
several years. Management believes that a fully invested, diversified portfolio
of real estate investments will mitigate the risk of nonpayment of rent from any
single lessee. As of August 8, 2002, CPA(R):15 had $121,278,000 available for
investment.
During the six months ended June 30, 2002, CPA(R):15 raised $154,876,000, net of
costs, in connection with its "best efforts" public offering. As of June 30,
2002, CPA(R):15 had approximately $70,000,000 of cash available for investment.
Since June 30, 2002, the Company issued an additional 5,458,000 shares
($54,580,000). CPA(R):15 is actively evaluating potential net lease investments
and is using its available cash along with limited recourse mortgage financing
to purchase properties. In connection with purchasing properties, CPA(R):15
obtained $39,492,000 of limited recourse mortgage debt. A lender on limited
recourse mortgage debt has recourse only to the property collateralizing such
debt and not to any of CPA(R):15's other assets. The use of limited recourse
debt, therefore, will allow CPA(R):15 to limit its risk, while unsecured debt
financing would give a lender recourse to all of CPA(R):15's assets. Management
believes that the strategy of combining equity and limited recourse mortgage
debt will allow CPA(R):15 to meet its short-term and long-term liquidity needs
and will help to diversify CPA(R):15's portfolio and, therefore, reduce
concentration of risk in any particular lessee. The ability to distribute cash
from CPA(R):15's equity investees in excess of their income is primarily due to
noncash charges for depreciation. Therefore, after CPA(R):15 completes its
public offering and fully invests in real estate, it will evaluate on an ongoing
basis whether to obtain additional sources of funds such as lines of credit;
however, no consideration is being given to such additional sources at this
time.
CPA(R):15 expects to fully subscribe its public offering before the end of the
year and intends to commence a second "best efforts" offering upon completion of
the current offering.
A summary of CPA(R):15's contractual obligations and commitments is as follows:
(in thousands) Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable $42,017 $136 $ 345 $ 364 $ 402 $ 434 $40,336
Deferred acquisition fees 2,776 -- 125 694 694 694 569
------- ---- ------ ------ ------ ------- -------
$44,793 $136 $ 470 $1,058 $1,096 $ 1,128 $40,905
======= ==== ====== ====== ====== ======= =======
-12-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
CPA(R):15's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and will
be amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on CPA(R):15's financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on CPA(R):15's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation 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 of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, CPA(R):15 will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented. CPA(R):15 has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
CPA(R):15 does not expect SFAS No. 146 to have a material effect on its
financial statements.
-13-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates and
equity prices. In pursuing its business plan, the primary market risk to which
CPA(R):15 is exposed is interest rate risk.
The value of CPA(R):15's 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 CPA(R):15's ability to
refinance its debt when balloon payments are scheduled.
Approximately $42,017,000 of CPA(R):15's long-term debt bears interest at fixed
rates, and the fair value of these instruments is affected by changes in market
interest rates. The following table presents principal cash flows based upon
expected maturity dates of the debt obligations and the related weighted-average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate on the fixed rate debt as of June 30, 2002 ranged from 7.46% to 7.98%.
There was no variable rate debt as of June 30, 2002.
(in thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ------- -------
Fixed rate debt $ 136 $ 345 $ 364 $ 402 $ 434 $ 40,336 $42,017 $42,017
Average interest
rate 7.62% 7.60% 7.60% 7.60% 7.60% 7.61%
-14-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
PART II
Item 2d. - USE OF PROCEEDS OF REGISTERED OFFERING
Pursuant to Rule 701 of Regulation S-K, the use of proceeds from the Company's
offering of common stock which commenced November 7, 2001 (File #333-58854) is
as follows as of June 30, 2002:
Shares registered: 40,000,000
Aggregate price of offering amount registered: $400,000,000
Shares sold: 17,321,954
Aggregated offering price of amount sold: $173,219,540
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: $ 1,912,306
Direct or indirect payments to others: $ 16,231,318
Net offering proceeds to the issuer after deducting expenses: $155,075,916
Purchases of real estate and equity investments: $ 83,136,167
Working capital reserves: $ 1,732,195
Temporary investments in cash and cash equivalents: $ 70,207,554
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders meeting was held on June 11, 2002, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a one-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No Shares Abstaining
- ---------------- ------------------- ----------------- ---------------- -----------------
William P. Carey 4,647,228 4,567,348 6,150 73,730
Francis X. Diebold 4,647,228 4,569,998 3,500 73,730
Elizabeth P. Munson 4,647,228 4,573,498 - 73,730
George E. Stoddard 4,647,228 4,557,228 16,270 73,730
Ralph F. Verni 4,647,228 4,572,748 750 73,730
Warren G. Wintrub 4,647,228 4,573,498 - 73,730
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
99.1 Chief Executive Officer's Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer's Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
During the quarter ended June 30, 2002, the Company was not
required to file any reports on Form 8-K.
-15-
CORPORATE PROPERTY ASSOCIATES 15 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 15 INCORPORATED
8/13/02 By: /s/ John J. Park
------------ -----------------
Date John J. Park
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
8/13/02 By: /s/ Claude Fernandez
------------ ---------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-18-