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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended SEPTEMBER 30, 2002
of
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CPA(R):14
A MARYLAND Corporation
IRS Employer Identification No. 13-3951476
SEC File Number 333-31437
50 ROCKEFELLER PLAZA,
NEW YORK, NEW YORK 10020
(212) 492-1100
CPA(R):14 has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CPA(R):14 HAS NO SECURITIES registered on any exchanges.
CPA(R):14 does not have any Securities registered pursuant to Section 12(b) of
the Act.
CPA(R):14 (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):14 has no active market for common stock at November 11, 2002.
CPA(R):14 has 66,310,741 shares of common stock, $.001 Par Value outstanding at
November 11, 2002.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
INDEX
Page No.
---------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, December 31, 2001
and September 30, 2002 2
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 2001 and 2002 3
Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2001 and 2002 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2002 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. - Controls and Procedures 16
PART II - Other Information
Item 2(d). - Use of Proceeds of Registered Offering 17
Item 4. - Submission of Matters to a Vote of Security Holders 17
Item 6. - Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19-20
* 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 14 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31, 2001 September 30, 2002
----------------- ------------------
(Note) (Unaudited)
------ -----------
ASSETS:
Land and buildings, net of accumulated depreciation of $17,728 at
December 31, 2001 and $32,902 at September 30, 2002 $ 781,319 $ 967,716
Net investment in direct financing leases 104,321 112,952
Real estate under construction - 9,925
Equity investments 41,690 40,973
Cash and cash equivalents 147,695 126,349
Marketable securities - 7,146
Other assets 22,213 40,285
--------- ---------
Total assets $1,097,238 $1,305,346
========= =========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 463,864 $ 655,684
Accrued interest 2,426 3,664
Accounts payable to affiliates 3,651 3,459
Accounts payable and accrued expenses 2,207 7,494
Prepaid rental income and security deposits 12,811 17,611
Deferred acquisition fees payable to affiliates 18,661 21,032
Dividends payable 11,318 12,448
--------- ---------
Total liabilities 514,938 721,392
--------- ---------
Minority interest 19,822 29,696
--------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000 shares; issued and
outstanding, 66,315,466 shares at December 31, 2001 and
66,879,978 shares at September 30, 2002 66 67
Additional paid-in capital 593,487 596,376
Dividends in excess of accumulated earnings (28,023) (41,318)
Accumulated other comprehensive (loss) income (101) 3,375
--------- ---------
565,429 558,500
Less, treasury stock at cost, 329,976 shares at December 31, 2001 and
476,248 shares at September 30, 2002 (2,951) (4,242)
--------- ---------
Total shareholders' equity 562,478 554,258
--------- ---------
Total liabilities, minority interest and shareholders'
equity $1,097,238 $1,305,346
========= =========
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 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of INCOME (UNAUDITED)
(In thousands, except share and per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues:
Rental income $ 14,965 $ 26,059 $ 39,017 $ 71,928
Interest income from direct financing leases 2,041 2,889 6,062 8,581
Interest and other income 810 552 1,926 1,737
---------- ---------- ---------- ----------
17,816 29,500 47,005 82,246
---------- ---------- ---------- ----------
Expenses:
Interest 6,305 11,862 14,689 32,246
Depreciation 3,309 5,340 8,749 15,082
General and administrative 1,027 2,016 3,051 4,721
Property expenses 2,523 3,338 6,646 9,590
---------- ---------- ---------- ----------
13,164 22,556 33,135 61,639
---------- ---------- ---------- ----------
Income from continuing operations
before minority interest, equity
investments and gain 4,652 6,944 13,870 20,607
Minority interest in income (36) (369) (53) (1,110)
Income from equity investments 1,114 1,342 3,035 3,931
---------- ---------- ---------- ----------
Income from continuing operations
before gain (loss) 5,730 7,917 16,852 23,428
Loss on sale of real estate (75) - (346) -
Unrealized gain (loss) on warrants and foreign
currency contract, net - (133) - 135
---------- ---------- ---------- ----------
Income from continuing operations 5,655 7,784 16,506 23,563
Discontinued operations:
Income from operations of discontinued properties 34 - 106 72
Gain on sale of real estate - - - 333
---------- ---------- ---------- ----------
Net income $ 5,689 $ 7,784 $ 16,612 $ 23,968
========== ========== ========== ==========
-
Basic and diluted earnings per share:
Income from continuing operations $ .11 $ .12 $ .34 $ .36
Discontinued operations - - - -
---------- ---------- ---------- ----------
Net income $ .11 $ .12 $ .34 $ .36
========== ========== ========== ==========
Weighted average shares outstanding - basic and
diluted 53,206,882 66,236,321 48,246,484 66,146,025
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Net income $ 5,689 $ 7,784 $ 16,612 $ 23,968
------ ------ ------- -------
Other comprehensive (loss) income:
Change in foreign currency translation
adjustment 187 (295) (24) 3,479
Unrealized loss on marketable securities - (3) - (3)
------ ------ ------- -------
Other comprehensive income (loss) 187 (298) (24) 3,476
------ ------ ------- -------
Comprehensive income $ 5,876 $ 7,486 $ 16,588 $ 27,444
====== ====== ======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended September 30,
-------------------------------
2001 2002
---- ----
Cash flows from operating activities:
Net income $ 16,612 $ 23,968
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Income from discontinued operations, including gain on sale of real estate - (405)
Depreciation and amortization 9,109 15,664
Straight-line rent adjustments (2,042) (3,182)
Income from equity investments in excess of distributions received - (19)
Fees paid by issuance of stock 4,085 3,640
Minority interest in income 53 1,110
Loss on sale of real estate 346 -
Funds released from escrow 4,568 -
Unrealized gain on warrants and foreign currency contract, net - (135)
Increase in prepaid rents and security deposits 4,488 4,800
Change in other operating assets and liabilities, net (1,784) 123
--------- ---------
Net cash provided by continuing operations 35,435 45,564
Net cash provided by discontinued operations 106 74
--------- ---------
Net cash provided by operating activities 35,541 45,638
--------- ---------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 983 736
Proceeds from sale of real estate 2,903 3,634
Purchases of real estate and equity investments and additional capitalized costs (189,360) (206,914)
VAT taxes recoverable on purchase of real estate - (1,957)
Purchase of securities - (8,397)
Proceeds from sale of securities - 1,245
Capital distribution from equity investments 15,003 -
Funds deposited in construction escrow (8,000) -
Funds released from escrow for construction 8,000 -
Payment of deferred acquisition fees (722) (1,638)
--------- ---------
Net cash used in investing activities (171,193) (213,291)
--------- ---------
Cash flows from financing activities:
Prepayment of mortgage principal (15,528) (3,800)
Proceeds from mortgages 114,587 190,775
Mortgage principal payments (1,757) (4,415)
Funding of defeasance escrow account - (2,537)
Distributions to minority interest partner (1,872) (1,994)
Contributions from minority interest partner 1,416 10,758
Proceeds from issuance of shares, net of costs 127,510 (1,750)
Deferred financing costs and mortgage deposits (3,343) (3,515)
Dividends paid (23,092) (36,133)
Purchase of treasury stock (698) (1,291)
--------- ---------
Net cash provided by financing activities 197,223 146,098
--------- ---------
Effect of exchange rate changes on cash - 209
--------- ---------
Net increase (decrease) in cash and cash equivalents 61,571 (21,346)
Cash and cash equivalents, beginning of period 35,547 147,695
--------- ---------
Cash and cash equivalents, end of period $ 97,118 $ 126,349
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of
Corporate Property Associates 14 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 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 year ended December 31, 2001.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Transactions with Related Parties:
The Company's asset management and performance fees payable to the Advisor,
Carey Asset Management Corp., a wholly-owned subsidiary of W. P. Carey & Co.
LLC, are each in the per annum amount of 1/2 of 1% of Average Invested Assets,
as defined in the Company's Advisory Agreement. Asset management fees were $927
and $1,489 for the three-month periods ended September 30, 2001 and 2002,
respectively, and $2,553 and $4,053 for the nine months ended September 30, 2001
and 2002, respectively, with performance fees in like amount. General and
administrative reimbursements were $401 and $611 for the three months ended
September 30, 2001 and 2002, respectively, and $993 and $1,578 for the nine
months ended September 30, 2001 and 2002, respectively.
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
installments over no less than eight years following the first anniversary of
the date a property is purchased. For transactions that were completed during
the nine months ended September 30, 2002, the current fees were $5,501.
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceed 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
these amounts, 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,
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 this limit in any such year.
Note 3. Mortgage Financing Through Securitization:
On August 28, 2002, the Company and three affiliates, W.P. Carey & Co. LLC ("W.
P. Carey"), Carey Institutional Properties Incorporated ("CIP(R)") and Corporate
Property Associates 12 Incorporated ("CPA(R):12") obtained an aggregate of
approximately $172,335 of limited recourse mortgage financing collateralized by
62 leased properties. The lender pooled the loans into a trust, Carey Commercial
Mortgage Trust, a non-affiliate, whose assets consist solely of the loans, and
sold the interests in the trust as collateralized mortgage obligations in a
private placement to institutional investors (the "Offered Interests"). The
Company and the three affiliates agreed to acquire a separate class of
subordinated interests in the trust (the "CPA(R) Interests"). The amount of
CPA(R) Interests acquired by the Company was proportional to the mortgage
amounts obtained.
-6-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
All of the mortgage loans provide for payments of principal and interest at an
annual rate of 7.5% and are based on a 25-year amortization schedule. Each loan
is collateralized by mortgages on the properties and lease assignments. Under
the lease assignments, the lessees direct their rent payment to the mortgage
servicing company which in turn distributes amounts in excess of debt service
requirements to the applicable lessors. Under certain limited conditions, a
property may be released from its mortgage by the substitution of another
property. Such substitution is subject to the approval of the trustee of the
trust.
The Offered Interests consist of $148,206 of mortgage loan balances with
different tranches of principal entitled to distributions at annual interest
rates as follows: $119,772 - 5.97%, $9,478 - 6.58%, $9,478 - 7.18% and $9,478 -
8.43%. The assumed final distribution dates for the four classes of Offered
Interests range from December 2011 through March 2012.
The CPA(R) Interests were purchased for $24,129 of which the Company's share was
$6,032, or 25%, and are comprised of two components, a component that will
receive payments of principal and interest and a component that will receive
payments of interest only. The CPA(R) Interests are subordinated to the Offered
Interests and will be payable only when and if all distributions to the Offered
Interests are current. The assumed final distribution date for the CPA(R)
Interests is June 30, 2012. The distributions to be paid to the CPA(R) Interests
do not have a stated rate of interest and will be affected by any shortfall in
rents received from the lessees or defaults at the mortgaged properties. As of
the purchase date, the Company's cost basis attributable to the principal and
interest and interest only components was $3,612 and $2,420, respectively. Over
the term of its ownership interest in the CPA(R) Interests, the value of the
interest only component will fully amortize to $0 and the principal and interest
component will amortize to its anticipated face value of its share in the
underlying mortgages (which currently is $6,032). For financial reporting
purposes, the effect of such amortization will be reflected in interest income.
Interest income, including all related amortization, will be recognized using an
effective interest method. As of September 30, 2002, the Company owned $1,120 of
Offered Interests which the Company intends to sell.
The Company is accounting for its interest in the CPA(R) Interests as an
available-for-sale security and will be measured at fair value with all gains
and losses from changes in fair value reported as a component of other
comprehensive income as part of shareholders' equity. As of September 30, 2002,
the fair value of the Company's CPA(R) Interests was $6,026, reflecting an
unrealized loss of $3. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. The Offered Interests held by
the Company and the three affiliates are being accounted for as trading
securities with any unrealized gains or losses included in the determination of
net income.
The Company obtained new mortgage financing, collateralized by real estate with
a carrying value of $60,939, as follows:
Lease Obligor Loan Amount Annual Debt Service Maturity Date
- ------------- ----------- ------------------- -------------
Stellex Technologies, Inc. $ 13,204 $ 1,171 March 2012
Meridian Automotive Systems, Inc. 7,316 649 June 2012
Barjan Products LLC 7,151 600 November 2010
International Garden Products, Inc. 6,660 559 September 2012
Fitness Holdings, Inc. 3,294 292 November 2011
Newpark Resources, Inc. 2,530 224 April 2012
Production Resource Group LLC 2,177 193 March 2010
------- ------
$ 42,332 $ 3,688
======= ======
-7-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 4. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
lease revenues for the nine-month periods ended September 30, 2001 and 2002 are
as follows:
2001 2002
---- ----
Per Statements of Income:
Rental income from operating leases $ 39,017 $ 71,928
Interest from direct financing leases 6,062 8,581
Adjustment:
Share of leasing revenue applicable to
minority interest (3,314) (5,588)
Share of leasing revenue from equity
investments 8,608 9,764
------- -------
$ 50,373 $ 84,685
======= =======
For the nine-month periods ended September 30, 2001 and 2002, the Company earned
its net lease revenues from its investments as follows:
2001 % 2002 %
---- ----
Petsmart, Inc. (a) - - $ 4,774 6%
Nortel Networks Limited. - - 4,501 5
Carrefour France, SAS - - 4,289 5
Atrium Companies, Inc. $ 1,989 4% 3,339 4
Advance PCS, Inc. 3,225 6 3,225 4
Federal Express Corporation (a) 2,897 6 2,929 3
Galyan's Trading Company 2,858 6 2,858 3
Advanced Micro Devices, Inc. (b) 2,286 5 2,444 3
Collins & Aikman Corporation 27 - 2,430 3
Metaldyne Company LLC 1,289 3 2,351 3
Applied Materials, Inc. (b) 2,296 5 2,325 3
APW North America Inc. 1,971 4 2,071 2
Amerix Corporation 1,778 4 1,843 2
Tower Automotive, Inc. - - 1,839 2
PerkinElmer, Inc. - - 1,834 2
Celestica Corporation 1,009 2 1,815 2
Institutional Jobbers Company 1,703 3 1,703 2
Buffets, Inc. 1,599 3 1,599 2
Gerber Scientific, Inc. 365 1 1,588 2
Checkfree Holdings Corporation, Inc. (b) 1,566 3 1,581 2
McLane Company, Inc. (b) 1,557 3 1,566 2
Builders Firstsource, Inc. (a) 752 1 1,479 2
Special Devices, Inc. (b) 628 1 1,472 2
Stellex Technologies, Inc. 1,412 3 1,471 2
Best Buy Co., Inc. 1,425 3 1,457 2
Gibson Guitar Corp. (c) 1,024 2 1,408 2
Nexpak Corporation 803 2 1,395 2
Waddington North America, Inc. 754 1 1,370 2
Consolidated Theaters Holding, G.P. 1,266 3 1,281 2
Other (b) (c) 13,894 26 20,448 22
------- --- ------- ---
$ 50,373 100% $ 84,685 100%
======= === ======= ---
-8-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
(a) Net of minority interest of an affiliate.
(b) Represents the Company's proportionate share of lease revenues from its
equity investments.
(c) Net of unaffiliated third party's minority interest.
Note 5. Equity Investments:
The Company owns interests in properties leased to corporations through equity
interests in various partnerships and limited liability companies and as
tenants-in-common subject to joint control. The ownership interests range from
33.33% to 50%. All of the underlying investments are owned with affiliates that
have similar investment objectives as the Company. The lessees are Advanced
Micro Devices, Inc., Compucom Systems, Inc., Textron, Inc., CheckFree Holdings,
Inc., Special Devices, Inc. and Applied Materials, Inc.
Summarized financial information of the Company's equity investees is as
follows:
(In thousands) December 31, 2001 September 30, 2002
----------------- ------------------
Assets (primarily real estate) $306,233 $300,587
Liabilities (primarily mortgage notes payable) 200,810 196,496
Partners' and members' equity 105,423 104,091
Nine Months Ended September 30,
-------------------------------
2001 2002
---- ----
Revenues (primarily rental revenues) $ 22,880 $ 25,396
Expenses (primarily interest on mortgages and depreciation) (14,467) (14,907)
------- -------
Net income $ 8,413 $ 10,489
======= =======
Note 6. Acquisitions of Real Estate:
In April 2001, the Company purchased four properties for $17,801 and entered
into a net lease with Waddington North America, Inc. ("Waddington"). The lease
provided for an initial term of 20 years and annual rent of $1,811. On August 5,
2002, the Company purchased land adjacent to the Waddington property in
Lancaster, Texas for $481 and, on September 17, 2002, entered into a commitment
to expand the existing property. The total cost of the expansion, including the
land purchase, is estimated to amount to $3,782. Upon completion of
improvements, which is expected to be completed in May 2003, annual rent will
increase to $2,192.
During the nine month period ended September 30, 2002, the Company acquired the
following properties, which were described in the Company's Quarterly Reports on
Form 10-Q for the periods ended March 31, 2002 and June 30, 2002. A summary of
the properties acquired is as follows:
(in thousands) Original
Mortgage Annual
Lease Obligor: Cost Annual Rent Financing Debt Service Date Acquired
- -------------- ---- ----------- --------- ------------ -------------
UTI Holdings, Inc./NASCAR Technical
Institute $11,011 $1,260 - - February 11, 2002
PW Eagle, Inc. 14,712 1,651 $ 8,200 $ 696 February 28, 2002
Heafner Tire Group, Inc. 14,974 1,645 8,750 780 March 26, 2002
Carrefour France, SAS 91,065 8,690 69,070 5,914 (a) March 26 and
July 1, 2002
Tower Automotive, Inc. 34,711 3,895 19,878 1,752 April 10, 2002
Career Education Corp. (c) 19,372 1,952 - - May 22, 2002
Katun Corporation 35,524 3,635 24,486 1,992 (b) July 5, 2002
(a) Variable rate obligation
(b) Includes a loan which is a variable rate obligation
(c) Build-to-suit commitment, lease scheduled to commence in 2003. On
October 9, 2002, the Company entered into a construction loan agreement
which will provide up to $12,500 of financing.
-9-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 7. Accounting Pronouncements:
In June 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 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. The Company does not expect
SFAS No. 147 to have a material effect on its financial statements.
-10-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
The following information should be read in conjunction with Corporate Property
Associates 14 Incorporated's ("CPA(R):14") condensed consolidated financial
statements and notes thereto as of September 30, 2002 included in this quarterly
report and CPA(R):14's Annual Report on Form 10-K for the year ended December
31, 2001. 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 CPA(R):14 to be
materially different from the results of operations or plans expressed or
implied by such forward looking statements. Accordingly, such information should
not be regarded as representations by CPA(R):14 that the results or conditions
described in such statements or the objectives and plans of CPA(R):14 will be
achieved. Item 1 of the Annual Report on Form 10-K for the year ended December
31, 2001 provides a description of CPA(R):14's business objectives, acquisition
and financing strategies and risk factors which could affect future operating
results.
Certain accounting policies are critical to the understanding of CPA(R):14's
financial condition and results of operations. Management believes that an
understanding of financial condition and results of operations requires an
understanding of accounting policies relating to the use of estimates.
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):14 must assess its ability to collect rent
and other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because CPA(R):14's real estate operations have a limited
number of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods.
CPA(R):14 also uses estimates and judgments when evaluating whether long-lived
assets are impaired. When events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, Management performs
projections of undiscounted cash flows, and if such cash flows are insufficient,
the assets are adjusted (i.e., written down) to their estimated fair value. An
analysis of whether a real estate asset has been impaired requires Management to
make its best estimate of market rents, residual values and holding periods. In
its evaluations, CPA(R):14 generally obtains market information from outside
sources; however, such information requires Management to determine whether the
information received is appropriate to the circumstances. As CPA(R):14's
investment objectives are to hold properties on a long-term basis, holding
periods used in the analyses generally range from five to ten years. Depending
on the assumptions made and estimates used, the future cash flow projected in
the evaluation of long-lived assets can vary within a range of outcomes.
CPA(R):14 will consider the likelihood of possible outcomes in determining the
best possible estimate of future cash flows. Because CPA(R):14's properties are
leased to single tenants, CPA(R):14 is more likely to incur significant
writedowns when circumstances deteriorate because of the possibility that a
property will be vacated in its entirety. This makes the risks faced by
CPA(R):14 different from the risks faced by companies that own multi-tenant
properties. Events or changes in circumstances can result in further writedowns
and impact the gain or loss ultimately realized upon sale of the asset. For its
direct financing leases, CPA(R):14 is required to perform a review of residual
values at least annually.
CPA(R):14 recognizes rental income from sales overrides when reported by
lessees, that is, after the level of sales requiring a rental payment to
CPA(R):14 is reached.
CPA(R):14 is accounting for its subordinated interest in a mortgage trust as an
available-for-sale security and will be measured at fair value with all changes
in fair value reported as a component of other comprehensive income as part of
shareholders' equity. Fair value is determined using a discounted cash flow
model with assumptions of market rates and the credit quality of the underlying
lessees.
CPA(R):14 and certain affiliates are investors in certain real estate ventures.
Certain of the investments are held through incorporated or unincorporated
jointly-held entities and certain investments are held directly as tenants in
common. Substantially all of these investments represent jointly purchased
properties which were net leased to a single tenant and were structured to
provide diversification and reduce concentration of a risk from a single lessee
for CPA(R):14 and the affiliate. The placement of an investment in a
jointly-held entity or tenancy in common requires the
-11-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
approval of CPA(R):14's Independent Directors. All of the jointly held
investments are structured so that CPA(R):14 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 either party has the
ability to make independent decisions. All of the jointly-held investments are
subject to contractual agreements.
CPA(R):14 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):14 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:
In November 2001, CPA(R):14 completed a second public offering of shares of
common stock, at which time it had raised equity of approximately $660,000.
CPA(R):14 is continuing to use the proceeds of the offerings to make investments
in net lease real estate. Since December 31, 2001, CPA(R):14 has invested more
than $200,000 in new real estate, and as of September 30, 2002 had more than
$126,000 of cash available for the acquisition of real estate investments.
CPA(R):14's asset base has increased by more than $208,000 during 2002 and by
$659,584 since January 1, 2001. The asset base is projected to continue to
increase until available cash is deployed fully in real estate. As a result of
the on-going acquisition activity, the results of operations for the three-month
and nine-month periods ended September 30, 2002 are not directly comparable to
the results for the three and nine months ended September 30, 2001 and are not
expected to be indicative of future operating results.
Income before gains and discontinued operations increased by $2,187 and $6,576
for the comparable three-month and nine-month periods, respectively. The
increases were due to an increase in lease revenues (rental income and interest
income from direct financing leases) and were offset, in part, by increases in
interest, depreciation, property and general and administrative expenses.
Revenues and expenses are projected to increase as the asset base increases and
additional limited recourse mortgage financing is obtained.
Lease revenues increased primarily as a result of real estate acquisitions and
the completion of build-to-suit commitments. Acquisitions and completion of
build-to-suit commitments in 2001 and 2002 contributed approximately $34,400 of
the $35,430 increase in lease revenues for the comparable nine-month periods.
Lease revenues also benefited from periodic rent increases on several leases
which increased annual revenues by approximately $215 for the nine-month period.
Substantially all of CPA(R):14's leases provide for rent increases, either based
on fixed amounts or a formula indexed to increases to the Consumer Price Index
("CPI"), with such increases generally scheduled every one, two or three years.
Most of CPA(R):14's leases have not yet reached their first scheduled rent
increase date. The effect of future rent increases is expected to be a more
significant component of the increase in lease revenues as the portfolio
matures. The majority of rent increases are based on CPI formulas, and future
rent increases will be affected by factors that are subject to fluctuations.
The increases in depreciation were attributable to the increase in real estate
assets. Depreciation, a charge which has no effect on cash flow, increased by
$2,031 and $6,333 in 2002 for the comparable three-month and nine-month periods.
The increase in interest expense was due to $246,607 of mortgage financing, net
of prepayments, obtained in 2001 and $190,775 in 2002. The increases in property
expenses were entirely due to the increase in management and performance fees
which are calculated based on CPA(R):14's real estate assets, including equity
investments.
The increase in income from equity investments was due to the acquisition in
June 2001 of properties leased to Special Devices Inc. (and represented a $314
increase for the current nine-month period), rent increases on three leases and
lower interest charges on a variable rate debt obligation which is indexed to
short-term LIBOR rates.
-12-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
During 2002, CPA(R):14 entered into new leases with American Tire Distributors
(formerly Heafner Tire Group, Inc.), Carrefour France SAS, PW Eagle, Inc., UTI
Holdings, Inc, Tower Automotive, Inc., Career Education Group and Katun
Corporation. These leases provide annual revenues of $22,938 and annual cash
flow (lease revenues less property-level mortgage debt service) of $11,813.
CPA(R):14 completed $165,466 of acquisitions in Europe in 2001 and 2002 and
believes that it has mitigated its foreign currency risk on those leases by
obtaining mortgage debt in the local currency. Several of the lessees or lease
guarantors are based in the United States or have significant domestic
operations including Nexpak Corporation, Katun and Perkin-Elmer, Inc.
CPA(R):14's lease with Burlington Motor Carriers, Inc. was terminated in
connection with Burlington's plan of reorganization in bankruptcy. The lease had
provided annual lease revenues of $833. The Burlington property is currently
vacant and CPA(R):14 is actively remarketing the property. Cash flow has
decreased by $128 as the result of the sale of a property leased to Atrium
Companies, Inc. CPA(R):14 continues to net lease five properties to Atrium.
In August 2002, in connection with obtaining $42,332 of mortgage debt, CPA(R):14
acquired interests in a mortgage trust. CPA(R):14 could realize up to $895 of
annual cash flow from this investment in the subordinated interest in the
mortgage trust. The rate of return on this investment is subject to certain
risks. Management projects that the effective rate of interest on the mortgages
obtained in the securitization, net of the projected cash flow from the interest
in the mortgage trust, will be approximately 6.25%.
FINANCIAL CONDITION:
CPA(R):14's cash and cash equivalents at September 30, 2002 have decreased
$21,346 since December 31, 2001, primarily as a result of acquiring properties.
As of September 30, 2002, CPA(R):14 has $126,349 in cash and cash equivalents.
CPA(R):14 intends to use its cash to meet working capital needs, acquire new
properties to further diversity its portfolio and complete its commitments on
build-to-suit construction. After CPA(R):14 is fully invested, CPA(R):14 will
maintain cash balances which Management believes to be sufficient for meeting
working capital needs.
For the nine months ended September 30, 2002, cash flows from operating
activities and equity investments of $46,374 were sufficient to pay dividends to
shareholders of $36,133, meet scheduled principal payment installments on
mortgage debt of $4,415 and distribute $1,994 to minority interests. As a result
of the new leases that have been entered into since December 31, 2001, operating
cash flow is projected to continue to increase and is expected to meet
CPA(R):14's objective of paying quarterly dividends at an increasing rate.
CPA(R):14 invests its cash in conservative, low-yielding money market
instruments until suitable real estate investments have been selected. Cash flow
from operations are projected to increase substantially after the funds are
invested in real estate.
CPA(R):14's investing activities include using $206,914 to purchase properties
leased to Carrefour SAS, American Tire, UTI Holdings, PW Eagle, Tower
Automotive, Inc., Career Education Corp. and Katun Corporation. In addition,
CPA(R):14 used $7,152 to purchase its interests in the mortgage loan pool. In
June 2002, CPA(R):14 sold a property in Greenville, Texas leased to Atrium
Companies, Inc. for $3,634 and recognized a gain on sale of $333. In January
2002, CPA(R):14 made its annual installment payment of deferred acquisition fees
to its Advisor of $1,638. In September 2002, CPA(R):14 entered into a $3,301
commitment to fund an expansion at its property leased to Waddington North
America, Inc. The expansion and a build-to-suit commitment with Career Education
Corp. are scheduled to be completed in 2003. The remaining commitments for the
two projects amount to $12,539.
The mortgage pool consists solely of $172,335 of newly-issued mortgage loans
collateralized by properties and lease assignments on properties owned by
CPA(R):14 and three affiliates. Interests representing $148,206 of the
securitized mortgage assets were offered to institutional investors and
subordinated interests of $24,129 were purchased by CPA(R):14 and its
affiliates. As of September 30, 2002, CPA(R):14 owned approximately $6,032 of
the subordinated interests and $1,120 of the offered interests. CPA(R):14
intends to sell its remaining offered interest. The subordinated interests are
payable only after all other classes of ownership receive their stated interest
and, therefore, will be affected by any defaults or nonpayments of rents by
lessees at the mortgaged properties, regardless of which affiliate owns the
underlying property. The cash flow of CPA(R):14, therefore, may be affected by
events that occur at affiliates. To the extent that there are no defaults or
nonpayments, CPA(R):14 may realize up to approximately $895
-13-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
in annual cash flow from its subordinated interest. Because the subordinated
interests incur any losses before the other interests, the risk of loss in cash
flow and market value of the investment is greatest for this interest, and there
is no assurance that there will be no adverse events that would significantly
diminish cash flow from this investment.
In addition to paying dividends to shareholders, principal payments on mortgage
debt and paying distributions to minority interest owners, CPA(R):14's financing
activities include $187,482 provided by proceeds from new mortgages, of which
$42,332 was obtained by the participation in the mortgage pool securitization.
Net of incurring costs in connection with obtaining the $42,332 of mortgage
financing and acquiring interests in the trust, CPA(R):14 retained cash of
approximately $33,790. CPA(R):14 was able to obtain favorable terms (7.5% annual
interest and a 25-year amortization schedule) on properties such as health clubs
which traditional mortgage lenders are currently financing at higher annual
interest rates. CPA(R):14 and its affiliates believe they have developed an
additional source of obtaining mortgage financing by raising funds from
non-traditional lenders and may seek to obtain additional limited recourse
mortgages through a mortgage securitization in the future. There are no current
plans for an additional securitization transaction. All of the loans are limited
recourse loans and have maturity dates between March 2010 and September 2012 at
which time balloon payments are scheduled. CPA(R):14 used $3,800 to pay off and
refinance a matured mortgage loan, in like amount, and $3,515 to pay for
financing costs and mortgage deposits in connection with obtaining new
financing. CPA(R):14 received $10,758 in the first quarter of 2002 from its
minority partner in three limited partnerships, Corporate Property Associates 15
Incorporated ("CPA(R):15"). CPA(R):15 was obligated to increase its ownership
interest in the jointly-owned investments which were acquired in the fourth
quarter of 2001. CPA(R):14 will consider jointly acquiring additional real
estate interests with affiliates to the extent that investment objectives are
consistent. By jointly acquiring properties with affiliates, CPA(R):14 is able
to increase the diversification of its portfolio. As of September 30, 2002, no
lessee represented more than 6% of revenues on a proportionate basis (see Note 4
to the accompanying condensed consolidated financial statements).
CPA(R):14 is continuing to diversify its portfolio by using its cash balances
along with additional limited recourse mortgage financing to purchase properties
subject to long-term net leases with corporate tenants on a single tenant basis.
Under a net lease, a tenant is generally required to pay all expenses related to
the leased property for real estate taxes, property maintenance and insurance
costs. A net lease, therefore, limits the impact on CPA(R):14 of the effects of
inflation on these property costs. CPA(R):14's leases, which generally have
initial lease terms of 10 to 20 years and provide the lessee with options for
renewal terms, typically include rent increase provisions which are fixed or
based upon increases in the Consumer Price Index. As of November 5, 2002,
CPA(R):14 had approximately $104,000 available for additional acquisitions and
completion of build-to-suit construction commitments.
A summary of CPA(R):14's contractual obligations and commitments is as follows:
(in thousands) Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Mortgage notes payable $655,684 $2,039 $ 8,803 $ 9,489 $10,399 $11,255 $613,699
Deferred acquisition fees 21,032 2,436 2,999 2,999 2,999 9,599
Subordinated disposition fees 240 240
Commitments:
Commitments for build-to-
suit construction 12,539 12,539
Share of minimum rents
payable under office cost-
sharing agreement 1,170 20 307 307 307 229 -
------- ----- ------ ------ ------ ------ -------
$690,665 $2,059 $24,085 $12,795 $13,705 $14,483 $623,538
======= ===== ====== ====== ====== ====== =======
In June 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.
-14-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
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):14'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):14'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):14'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 CPA(R):14'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):14 will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented. CPA(R):14 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 provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. CPA(R):14 does not expect
SFAS No. 146 to have a material effect on its financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. CPA(R):14 does not expect
SFAS No. 147 to have a material effect on its financial statements.
-15-
CORPORATE PROPERTY ASSOCIATES 14 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 risks to which CPA(R):14 is exposed are interest rate
risk and foreign currency exchange risk.
The value of CPA(R):14'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):14's ability to
refinance its debt when balloon payments are scheduled.
CPA(R):14 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 September
30, 2002 the interests in CCMT had a fair value of $7,146,000, which
approximates cost.
Approximately $640,674,000 of CPA(R):14's long-term debt bears interest at fixed
rates, and therefore the fair value of these instruments is affected by changes
in the 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 September 30, 2002 ranged
from 6.091% to 8.85%. The interest rate on the variable rate debt as of
September 30, 2002 ranged from 6.48% to 8.09%.
(in thousands) 2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $1,992 $8,606 $9,274 $10,174 $11,023 $599,605 $640,674 $649,960
Weighted average
interest rate 7.28% 7.22% 7.21% 7.21% 7.21% 7.46%
Variable rate debt $ 47 $ 197 $ 215 $ 225 $ 232 $ 14,094 $ 15,010 $ 15,010
CPA(R):14 has foreign operations. Accordingly, CPA(R):14 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):14's
financial position or results of operations. To date we have not entered into
any foreign currency forward exchange contracts to hedge the effects of adverse
fluctuations in foreign currency exchange. One of CPA(R):14's lease agreements
provides the option to receive a portion of the rent in dollars or the local
currency; this option is considered a derivative financial instrument and
changes in the fair value of the option are included in the determination of net
income.
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
September 30, 2002.
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 pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART II
Item 2 (d). - 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 17, 1999 (File # 333-76761) is
as follows as of September 30, 2002:
Shares registered: 40,000,000
Aggregate price of offering amount registered: $400,000,000
Shares sold: 36,353,686
Aggregated offering price of amount sold: $363,536,860
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: $ 6,756,359
Direct or indirect payments to others: $ 29,019,800
Net offering proceeds to the issuer after deducting expenses: $327,760,701
Purchases of real estate: $249,726,040
Working capital reserves: $ 3,635,369
Temporary investments in cash and cash equivalents: $ 74,399,292
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2002, no matters were submitted
to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
99.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 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 September 30, 2002, the Company was
not required to file any reports on Form 8-K.
-17-
CORPORATE PROPERTY ASSOCIATES 14 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 14 INCORPORATED
11/11/2002 By: /s/ John J. Park
------------- ----------------------------------------
Date John J. Park
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
11/11/2002 By: /s/ Claude Fernandez
------------- ----------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-18-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 14 Incorporated (the "Registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and we have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002 Date 11/11/2002
--------------------------- ----------------------------
/s/ William Polk Carey /s/ Gordon F. Dugan
--------------------------- ----------------------------
William Polk Carey Gordon F. DuGan
Chairman Vice Chairman
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 14 Incorporated (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002
/s/ John J. Park
---------------------------
John J. Park
Chief Financial Officer
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