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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 000-25771
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3951476
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
-------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X].
Registrant has no active market for its common stock as of March 25, 2003.
Non-affiliates held 65,244,994 shares as of March 20, 2003.
As of March 25, 2003, there are 66,281,882 shares of common stock of
Registrant outstanding.
CPA(R):14 incorporates by reference its definitive Proxy Statement with
respect to its 2003 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
PART I
Item 1. Business.
Corporate Property Associates 14 Incorporated ("CPA(R):14") is a Real Estate
Investment Trust ("REIT") that acquires and owns commercial properties leased to
companies nationwide, primarily on a triple net basis. As of December 31, 2002,
CPA(R):14's portfolio consisted of 136 properties leased to 60 tenants and
totaling more than 24.6 million square feet.
CPA(R):14's core investment strategy is to purchase and own properties leased to
a variety of companies on a single tenant net lease basis. These leases
generally place the economic burden of ownership on the tenant by requiring them
to pay the costs of maintenance, insurance, taxes, structural repairs and other
operating expenses. CPA(R):14 also generally includes in its leases:
- clauses providing for mandated rent increases or periodic
rent increases tied to increases in the consumer price
index or other indices or, when appropriate, increases
tied to the volume of sales at the property;
- covenants restricting the activity of the tenant to
reduce the risk of a change in credit quality;
- indemnification of CPA(R):14 for environmental and other
liabilities; and
- when appropriate, guarantees from parent companies or
other entities.
CPA(R):14 was formed as a Maryland corporation on June 4, 1997. Between November
1997 and November 2001, CPA(R):14 sold a total of 65,794,280 shares of common
stock for a total of $657,942,800 in gross offering proceeds. During the fourth
quarter of 2002, CPA(R):14 established a dividend reinvestment plan. Through
December 31, 2002, CPA(R):14 has issued 3,000 shares through the dividend
reinvestment plan. These proceeds are being combined with limited recourse
mortgage debt to acquire a portfolio of properties. As a REIT, CPA(R):14 is not
subject to federal income taxation as long as it satisfies certain requirements
relating to the nature of its income, the level of its distributions and other
factors.
Carey Asset Management Corp., CPA(R):14's advisor, provides both strategic and
day-to-day management for CPA(R):14, including acquisition services, research,
investment analysis, asset management, capital funding services, disposition of
assets, investor relations and administrative services. Carey Asset Management
Corp. also provides office space and other facilities for CPA(R):14. Carey Asset
Management Corp. has dedicated senior executives in each area of its
organization so that CPA(R):14 functions as a fully integrated operating
company. CPA(R):14 pays asset management fees to Carey Asset Management Corp.
and pays certain transactional fees. CPA(R):14 also reimburses Carey Asset
Management Corp. for certain expenses. Carey Asset Management Corp. also serves
in this capacity for Carey Institutional Properties Incorporated, Corporate
Property Associates 12 Incorporated and Corporate Property Associates 15
Incorporated. Carey Asset Management Corp. is a wholly-owned subsidiary of W. P.
Carey & Co. LLC, a company with shares listed on the New York Stock Exchange and
Pacific Exchange under the symbol "WPC."
CPA(R):14's principal executive offices are located at 50 Rockefeller Plaza, New
York, NY 10020 and its telephone number is (212) 492-1100. As of December 31,
2002, CPA(R):14 had no employees. Carey Asset Management Corp. employs 27
individuals who perform services for CPA(R):14. CPA(R):14's website address is
http://www.CPA14.com.
BUSINESS OBJECTIVES AND STRATEGY
CPA(R):14's objectives are to:
- pay quarterly dividends at an increasing rate that for taxable
shareholders are partially free from current taxation;
- provide inflation protected income;
- purchase and own a diversified portfolio of net-leased real estate
that will increase in value; and
- increase the value of its shares by increasing the equity in its
real estate by making regular mortgage principal payments.
-1-
CPA(R):14 seeks to achieve these objectives by purchasing and holding industrial
and commercial properties each net leased to a single corporate tenant.
CPA(R):14's portfolio is diversified by geography, property type and by tenant.
DEVELOPMENTS DURING 2002
In February 2002, CPA(R):14 received $10,766,000 from its affiliate, Corporate
Property Associates 15 Incorporated ("CPA(R):15"), when CPA(R):15 exercised its
purchase option to increase its minority interest ownership interests in limited
partnerships that net lease properties to Petsmart, Inc. and Builders
Firstsource, Inc. to 30% and 40%, respectively. In January 2002, the Builders
Firstsource limited partnership obtained a $7,600,000 limited recourse mortgage
loan on the Builders Firstsource property. The loan provides for monthly
payments of principal and interest totaling $56,510 based on an annual interest
rate of 7.57% and a 25-year amortization schedule.
On February 11, 2002, CPA(R):14 purchased a property in Mooresville, North
Carolina on which a building was constructed on a build-to-suit basis and
entered into a net lease with UTI Holdings, Inc. and Nascar Technical Institute,
Inc. The total purchase price including construction costs was $11,011,356. On
September 29, 2002, an initial lease term of 20 years commenced at an initial
annual rent of $1,260,230. The lease provides for stated annual increases of
2.5% and three seven year renewal terms.
In December 2000, CPA(R):14 purchased a property in St. Charles, Missouri leased
to Fitness Holdings, Inc., and obtained limited recourse mortgage financing of
$3,800,000. On February 22, 2002, CPA(R):14 paid off the loan and obtained a new
limited recourse mortgage loan of $3,800,000 collateralized by the property. The
new loan provides for monthly payments of principal and interest totaling
$26,648 based on an annual interest rate of 7.53% and a 30-year amortization
schedule.
On February 28, 2002, CPA(R):14 purchased properties in Tacoma, Washington;
Eugene, Oregon; Perris, California and West Jordan, Utah for $14,712,042 and
entered into a master net lease with PW Eagle, Inc. The PW Eagle lease has an
initial term of 20 years with two ten-year renewal terms and provides for an
initial annual rent of $1,650,875 with increases every two years based on a
formula indexed to increases in the Consumer Price Index ("CPI"). In
consideration for structuring the lease, PW Eagle granted CPA(R):14 120,000
warrants for PW Eagle common stock, exercisable over twenty years at $.01 per
share. CPA(R):14 obtained a limited recourse mortgage loan of $8,200,000
collateralized by deeds of trust on the PW Eagle properties and a lease
assignment. The loan provides for monthly payments of interest and principal of
$57,898 at an annual interest rate of 7.6% and a thirty-year amortization
schedule. The loan matures in February 2012, at which time a balloon payment is
scheduled.
On March 26, 2002, CPA(R):14 purchased properties in Lincolnton and Charlotte,
North Carolina and Maudlin, South Carolina for $14,973,822 and entered into a
net lease with Heafner Tire Group, Inc. The Heafner lease has an initial term of
20 years with two ten-year renewal options and provides for an initial annual
rent of $1,644,500, with increases every two years based on a formula indexed to
increases in the CPI and capped at 8.16%. In connection with the purchase,
CPA(R):14 obtained a limited recourse mortgage loan of $8,750,000 collateralized
by a mortgage and lease assignment. The loan provides for monthly payments of
interest and principal of $64,754 at an annual interest rate of 8.09% based on a
thirty-year amortization schedule. The loan matures in April 2012, at which time
a balloon payment is scheduled. In consideration for structuring the leases,
Heafner granted CPA(R):14 warrants for 153,597 shares of common stock
representing 0.75% of the fully diluted shares of Heafner. The warrants have a
per share exercise price of $3.00 and are exercisable over a ten-year period.
Heafner has changed its name to American Tire Distributors, Inc.
On March 26, 2002, CPA(R):14 purchased eight properties in France for Euro
86,666,128 ($72,049,602) at the date of acquisition) and entered into seven
separate net leases with Societe Logidis. The lease obligations of Societe
Logidis are unconditionally guaranteed by its parent company, Carrefour France,
SAS. The leases have nine-year terms and provide for aggregate annual rent of
Euro 8,185,999 ($7,183,214 at the date of acquisition), with annual rent
increases based on a formula indexed to increases in the INSEE, a French
construction cost index. In connection with the purchase of the Carrefour
properties, CPA(R):14 obtained a limited recourse mortgage loan of Euro
64,700,000 ($56,774,250 at the date of acquisition) which provides for quarterly
payments of interest at an annual interest rate of 6.38%. The interest rate is
fixed through 2012, at which time CPA(R):14 has the option to choose either a
variable rate based on the Euribor three-month or a fixed rate based on the
lenders' cost to refinance the loan. Principal installments are payable based on
an initial 2.20% annuity per annum, with scheduled increases throughout the term
of the loan. The loan matures on April 30, 2017, at which time a balloon payment
is scheduled.
On July 1, 2002 CPA(R):14 purchased a property in Lieusaint, France for Euro
15,165,884 ($15,015,727 at the date of acquisition) and entered into an
additional net lease with Societe Logidis. The lease obligations of Societe
Logidis
-2-
are unconditionally guaranteed by Carrefour. The lease has a nine-year term and
provides for annual rent of Euro 1,520,279 ($1,507,265 at the date of
acquisition), with annual rent increases based on a formula indexed to increases
in the INSEE. In connection with the purchase of the Carrefour property,
CPA(R):14 obtained a limited recourse mortgage loan of Euro 12,400,000
($12,295,840 at the date of acquisition) which provides for quarterly payments
of interest at an annual interest rate of 6.38%. The interest rate is fixed
through 2012, at which time CPA(R):14 has the option to choose either a variable
rate based on the Euribor three-month rate or a fixed rate based on the lenders'
cost to refinance the loan. Principal installments are payable based on an
initial 2.20% annuity per annum, with scheduled increases throughout the term of
the loan. The loan matures on April 30, 2017, at which time a balloon payment is
scheduled.
On April 10, 2002, CPA(R):14 purchased land and buildings in Granite City,
Illinois; Kendallville, Indiana; Clinton, Michigan and Upper Sandusky, Ohio for
$34,711,184 and entered into a master net lease with Tower Automotive Products
Company, Inc. and Tower Automotive Tool LLC (collectively, "Tower"). The lease
obligations have been unconditionally guaranteed by Tower Automotive, Inc., the
parent company. The lease has an initial term of 18 years followed by two
ten-year renewal options. Annual rent is initially $3,895,125 with rent
increases every three years based on a formula indexed to increases in the CPI.
In connection with the purchase, CPA(R):14 obtained $19,878,130 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
$145,582 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 22, 2002, CPA(R):14 purchased a property in Upper Saucon Township,
Pennsylvania on which a building is being constructed on a build-to-suit basis
and entered into a net lease with Allentown Business School, Ltd. The lease
obligations have been unconditionally guaranteed by Career Education Corp., the
parent company. The total purchase price including construction costs is
estimated to be $19,371,728. On July 1, 2003, a lease term of 20 years with two
ten-year renewal terms will commence at an annual rent of $1,951,750 if the
entire estimated funding of the build-to-suit project is required. Initial
annual rent will be increased by 10.55% of the funding of any project cost
overruns resulting from lessee change orders during the construction period, or
decreased by 10.55% of the amounts for a tenant improvement allowance that are
not used. The lease provides for rent increases every two years based on a
formula indexed to increases in the CPI, capped at 6.5%.
On June 21, 2002, CPA(R):14 sold a property in Greenville, Texas leased to
Atrium Companies, Inc. ("Atrium") for $3,633,781 and recognized a gain on sale
of $333,361. Atrium continues to lease five properties from CPA(R):14.
On July 5, 2002, CPA(R):14 purchased land and buildings in Davenport, Iowa,
Bloomington, Minnesota and Edisonweg, Gorinchem, the Netherlands for $35,523,560
and entered into a master net lease with Katun Corporation ("Katun") for the
Iowa and Minnesota properties and a net lease with Katun (E.D.C.) B.V. for the
Netherlands property. The lease obligations of Katun (E.D.C.) B.V. have been
unconditionally guaranteed by Katun, the parent company. Both leases have an
initial term of 20 years followed by two ten-year renewal options. Annual rent
is initially $2,971,350 for the Iowa and Minnesota properties and Euros 678,241
($664,304 as of the date of acquisition) for the Netherlands property. Both
leases provide for rent increases on the fourth lease anniversary and every
three years thereafter based on a formula indexed to increases in the CPI. In
connection with the purchase of the Iowa and Minnesota properties, CPA(R):14
obtained $19,000,000 of limited recourse mortgage financing collateralized by a
mortgage on the properties and a lease assignment. The loan provides for monthly
payments of interest and principal of $128,327 at an annual interest rate of
7.15% and based on a 30-year amortization schedule. The loan matures in August
2012 at which time a balloon payment is scheduled. In connection with the
purchase of the Netherlands property, CPA(R):14 obtained Euros 5,600,000
($5,486,880 as of the date of acquisition) of limited recourse mortgage
financing collateralized by a mortgage on the property. The loan provides for
quarterly payments of interest at an annual interest rate of 6.50%. Principal
installments are payable based on an initial 1.75% annuity per annum, with
scheduled increases throughout the term of the loan. The loan matures on June
30, 2022, at which time a balloon payment is scheduled.
On August 28, 2002, CPA(R):14 and three affiliates, W. P. Carey & Co. LLC, Carey
Institutional Properties Incorporated and Corporate Property Associates 12
Incorporated obtained an aggregate of approximately $172,335,000 of limited
recourse mortgage financing collateralized by 62 leased properties. The lender
pooled the loans into a trust, Carey Commercial Mortgage Trust, a non-affiliate,
whose assets consist solely of the loans, and sold the interests in the trust as
collateralized mortgage obligations in a private placement to institutional
investors. CPA(R):14 and the three affiliates agreed to acquire a separate class
of subordinated interests in the trust (the "CPA(R) Interests"). The amount of
CPA(R) Interests acquired by CPA(R):14 was proportional to the mortgage amounts
obtained.
-3-
CPA(R):14 obtained new mortgage financing proceeds in this transaction of
approximately $42,332,686. The CPA(R) Interests were purchased for $24,128,739
of which CPA(R):14's share was $6,032,185, or 25%.
The loans obtained were as follows:
(in thousands)
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
=========== ============
The loans provide for payments of principal and interest at an annual rate of
7.5% and are based on a 25-year amortization schedule. Balloon payments are due
on the maturity dates.
In April 2001, CPA(R):14 purchased four properties for $17,801,047 and entered
into a net lease with Waddington North America, Inc. The lease provided for an
initial term of 20 years and annual rent of $1,810,500. On August 5, 2002,
CPA(R):14 purchased land adjacent to the Waddington property in Lancaster, Texas
for $480,904 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 $3,781,545. Upon completion of improvements, which is
expected to be completed in May 2003, annual rent will increase to $2,192,100.
In June 1999, CPA(R):14 purchased a property in Harrisburg, North Carolina upon
which a build-to-suit facility was constructed and net leased to Builders'
Supply and Lumber Co., Inc. On September 30, 2002, CPA(R):14 obtained a
$6,500,000 limited recourse mortgage loan collateralized by the property. The
loan provides for monthly payments of principal and interest totaling $42,718
based on an annual interest rate of 6.21% and a 25-year amortization schedule.
On December 26, 2002, CPA(R):14, CPA(R):12 and CPA(R):15 through three newly
formed limited partnerships with ownership interests of 35%, 15% and 50%
respectively, purchased land and seven buildings located in Kingman, Arizona;
Woodland, California; Jonesboro, Georgia; Kansas City, Missouri; Springfield,
Oregon; Fogelsville, Pennsylvania and Corsicana, Texas for $131,678,450, and
entered into three master net leases with TruServ. The leases have initial terms
of 20 years followed by one renewal term of nine years and 11 months and a
second renewal term of 10 years. The leases provide for aggregate initial rent
of $12,007,151, with stated annual increases. In connection with the purchase of
the properties, the limited partnerships obtained limited recourse mortgage
loans totaling $76,654,821 (including $27,550,047 obtained in January 2003),
collateralized by deeds of trust on the properties, and lease assignments. The
loans provide for aggregate monthly payments of interest and principal of
$451,134, at an annual interest rate of 5.83% based on 30-year amortization
schedules. The loans mature in January and February 2013 at which time balloon
payments are scheduled.
On December 12, 2002, CPA(R):14 and CPA(R):15 formed a limited partnership with
40% and 60% interests, respectively and, which purchased a property in New York,
New York for $152,041,885 and assumed an existing net lease with SFX
Entertainment, Inc. The lease obligations are unconditionally guaranteed by the
lessees' parent company, Clear Channel. The lease has a remaining term through
September 2020 with two ten-year renewal options. The lease provides for an
initial annual rent of $10,914,312 with stated rent increases every five years.
In connection with the purchase of the properties, the limited partnership
obtained limited recourse mortgage financing of $85,000,000 collateralized by a
mortgage and security agreement. The loan provides for monthly payments of
interest and principal of $481,473 at an annual interest rate of 5.52% based on
a 30-year amortization schedule. The loan matures in December 2012 at which time
a balloon payment is scheduled.
On February 7, 2003, CPA(R):14, CPA(R):12 and CPA(R):15, through a newly-formed
limited liability company with ownership interests of 41%, 15% and 44%,
respectively, purchased land and 15 health club facilities for $178,010,471 and
entered into a master net lease with Starmark Camhood, L.L.C. ("Starmark"). The
lease obligations of Starmark are jointly unconditionally guaranteed by seven of
its affiliates. The Starmark lease provides for an initial lease term of 20
years with three ten-year renewal terms. Annual rent is initially $18,272,400
with CPI-based increases scheduled in November 2006, 2010, 2014, 2018 and 2021.
$167,400 of annual rent will not be
-4-
included in the determination of the future rent increases. In connection with
the purchase, the limited liability company obtained first mortgage limited
recourse financing of $88,300,000 and a mezzanine loan of $20,000,000. the first
mortgage provides for monthly payments of interest and principal of $563,936 at
an annual interest rate of 6.6% and based on a 30-year amortization schedule.
The loan matures in March 2013 at which time a balloon payment is scheduled. The
mezzanine loan provides for monthly payments of interest and principal of
$277,201 at an annual interest rate of 11.15% and will fully amortize over its
ten-year term. The limited liability company was granted 5,276 warrants for
Class C Unit interests in Starmark and represent a 5% interest in the Company.
The warrants which may be exercised at any time through February 7, 2023 at an
exercise price of $430 per unit. The warrant agreement does not provide for a
cashless exercise of units.
ACQUISITION STRATEGIES
Carey Asset Management Corp. has a well-developed process with established
procedures and systems for acquiring net leased property on behalf of CPA(R):14.
As a result of its reputation and experience in the industry and the contacts
maintained by its professionals, Carey Asset Management Corp. has a presence in
the net lease market that has provided it with the opportunity to invest in a
significant number of transactions on an ongoing basis. CPA(R):14 takes
advantage of Carey Asset Management Corp.'s presence in the net lease market to
build its portfolio. In evaluating opportunities for CPA(R):14, Carey Asset
Management Corp. carefully examines the credit, management and other attributes
of the tenant and the importance of the property under consideration to the
tenant's operations. Careful credit analysis is a crucial aspect of every
transaction. CPA(R):14 believes that Carey Asset Management Corp. has one of the
most extensive underwriting processes in the industry and has an experienced
staff of professionals involved with underwriting transactions. Carey Asset
Management Corp. seeks to identify those prospective tenants whose
creditworthiness is likely to improve over time. CPA(R):14 believes that the
experience of Carey Asset Management Corp.'s management in structuring
sale-leaseback transactions to meet the needs of a prospective tenant enables
Carey Asset Management Corp. to obtain a higher return for a given level of risk
than would typically be available by purchasing a property subject to an
existing lease.
Carey Asset Management Corp.'s strategy in structuring its net lease investments
for CPA(R):14 is to:
- combine the stability and security of long-term lease payments,
including rent increases, with the appreciation potential inherent
in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type of
facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements from
the tenant when possible, such as warrants to purchase tenant
common stock.
FINANCING STRATEGIES
Consistent with its investment policies, CPA(R):14 uses leverage when available
on favorable terms. CPA(R):14 has approximately $666,740,000 in property level
debt outstanding. These mortgages mature between 2008 and 2026 and have interest
rates between 3.38% and 8.85%.
Carey Asset Management Corp. continually seeks opportunities and considers
alternative financing techniques, including the mortgage securitization
transaction described in Current Developments above, in order to finance
properties not currently subject to debt, refinance debt, reduce interest
expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, Carey Asset Management Corp. reviews and
structures many aspects of a transaction, including the tenant, the real estate
and the lease, to determine whether a potential acquisition can be structured to
satisfy CPA(R):14's acquisition criteria. The aspects of a transaction which are
reviewed and structured by Carey Asset Management Corp. include the following:
Tenant Evaluation. Carey Asset Management Corp. evaluates each
potential tenant for its credit, management, position within its
industry, operating history and profitability. Carey Asset Management
Corp. seeks tenants it believes will have stable or improving credit.
By leasing properties to these tenants, CPA(R):14 can generally charge
rent that is higher than the rent charged to tenants with recognized
credit and thereby enhance its current return from these properties as
compared with properties leased to companies whose credit potential has
already been recognized by the market. Furthermore, if a tenant's
credit does improve, the value of CPA(R):14's property will likely
increase (if all other factors affecting value remain unchanged).
-5-
Carey Asset Management Corp. may also seek to enhance the likelihood of
a tenant's lease obligations being satisfied, such as through a letter
of credit or a guaranty of lease obligations from the tenant's
corporate parent. This credit enhancement provides CPA(R):14 with
additional financial security. In evaluating a possible investment, the
creditworthiness of a tenant generally will be a more significant
factor than the value of the property absent the lease with such
tenant. While Carey Asset Management Corp. will select tenants it
believes are creditworthy, tenants will not be required to meet any
minimum rating established by an independent credit rating agency.
Carey Asset Management Corp.'s and the investment committee's standards
for determining whether a particular tenant is creditworthy vary in
accordance with a variety of factors relating to specific prospective
tenants. The creditworthiness of a tenant is determined on a tenant by
tenant, case by case basis. Therefore, general standards for
creditworthiness cannot be applied.
Leases with Increasing Rent. Carey Asset Management Corp. typically
includes, or attempts to include a clause in each lease that provides
for increases in rent over the term of the lease. These increases are
generally tied to increases in indices such as the consumer price
index. In the case of retail stores, these leases often provide for
participation in gross sales above a stated level. The lease may also
provide for mandated rental increases on specific dates or other
methods that may not have been in existence or contemplated by us as of
the date of this report. Carey Asset Management Corp. seeks to avoid
entering into leases that provide for contractual reductions in rents
during their primary term.
Properties Important to Tenant Operations. Carey Asset Management Corp.
generally seeks to acquire properties with operations that are
essential or important to the ongoing operations of the tenant. Carey
Asset Management Corp. believes that these properties provide better
protection in the event a tenant files for bankruptcy, since leases on
properties essential or important to the operations of a bankrupt
tenant are less likely to be terminated by a bankrupt tenant. Carey
Asset Management Corp. also seeks to assess the income, cash flow and
profitability of the business conducted at the property so that, if the
tenant is unable to operate its business, CPA(R):14 can either continue
operating the business conducted at the property or re-lease the
property to another entity in the industry which can operate the
property profitably.
Lease Provisions that Enhance and Protect Value. When appropriate,
Carey Asset Management Corp. attempts to include provisions in its
leases that require its consent to specified tenant activity or require
the tenant to satisfy specific operating tests. These provisions
include, for example, operational and financial covenants of the
tenant, prohibitions on a change in control of the tenant and
indemnification from the tenant against environmental and other
contingent liabilities. These provisions protect CPA(R):14's investment
from changes in the operating and financial characteristics of a tenant
that may impact its ability to satisfy its obligations to us or could
reduce the value of CPA(R):14's properties.
Diversification. Carey Asset Management Corp. will continue to
diversify CPA(R):14's portfolio to avoid dependence on any one
particular tenant, type of facility, geographic location or tenant
industry. By diversifying CPA(R):14's portfolio, Carey Asset Management
Corp. reduces the adverse effect of a single under-performing
investment or a downturn in any particular industry or geographic
region.
Carey Asset Management Corp. uses a variety of other strategies in connection
with its acquisitions. These strategies include attempting to obtain equity
enhancements in connection with transactions. Typically, these equity
enhancements involve warrants to purchase stock of the tenant or the stock of
the parent of the tenant. If the value of the stock exceeds the exercise price
of the warrant, equity enhancements help CPA(R):14 to achieve its goal of
increasing funds available for the payment of distributions.
As a transaction is structured, it is evaluated by the chairman of Carey Asset
Management Corp.'s investment committee. Before a property is acquired, the
transaction is reviewed by the investment committee to ensure that it satisfies
CPA(R):14's investment criteria. The investment committee is not directly
involved in originating or negotiating potential acquisitions, but instead
functions as a separate and final step in the acquisition process. Carey Asset
Management Corp. places special emphasis on having experienced individuals serve
on its investment committee and does not invest in a transaction unless it is
approved by the investment committee.
CPA(R):14 believes that the investment committee review process gives it a
unique competitive advantage over other net lease companies because of the
substantial experience and perspective that the investment committee has in
evaluating the blend of corporate credit, real estate and lease terms that
combine to make an acceptable risk.
The following people serve on the investment committee:
-6-
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the CPA(R)
programs for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer
was responsible for all of Prudential's investments, including
stocks, bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice President
-- Head of Bond & Corporate Finance Department of the John Hancock
Mutual Life Insurance Company. His responsibility included
overseeing fixed income investments for Hancock, its affiliates
and outside clients.
- Lawrence R. Klein is the Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton School.
Dr. Klein has been awarded the Alfred Nobel Memorial Prize in
Economic Sciences and currently advises various governments and
government agencies.
Each property purchased by CPA(R):14 has been and future purchases will be
appraised by an independent appraiser. CPA(R):14 will not purchase any property
that has a total property cost (the purchase price of the property plus all
acquisition fees) which is in excess of its appraised value. These appraisals
may take into consideration, among other things, the terms and conditions of the
particular lease transaction, the quality of the lessee's credit and the
conditions of the credit markets at the time the lease transaction is
negotiated. The appraised value may be greater than the construction cost or the
replacement cost of a property, and the actual sale price of a property if sold
by CPA(R):14 may be greater or less than the appraised value.
Carey Asset Management Corp.'s practices include performing evaluations of the
physical condition of properties and performing environmental surveys in an
attempt to determine potential environmental liabilities associated with a
property prior to its acquisition. CPA(R):14 will also consider factors peculiar
to the laws of foreign countries, in addition to the risk normally associated
with real property investments, when considering an investment located outside
the United States.
ASSET MANAGEMENT
CPA(R):14 believes that effective management of its net lease assets is
essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
Carey Asset Management Corp. monitors, on an ongoing basis, compliance by
tenants with their lease obligations and other factors that could affect the
financial performance of any of its properties. Monitoring involves receiving
assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the properties it occupies and confirming that appropriate
insurance coverage is being maintained by the tenant. Carey Asset Management
Corp. reviews financial statements of its tenants and undertakes regular
physical inspections of the condition and maintenance of its properties.
Additionally, Carey Asset Management Corp. periodically analyzes each tenant's
financial condition, the industry in which each tenant operates and each
tenant's relative strength in its industry.
HOLDING PERIOD
CPA(R):14 intends to hold each property it acquires for an extended period. The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors with a view to
achieving maximum capital appreciation and after-tax return for the CPA(R):14
shareholders. If CPA(R):14's common stock is not listed for trading on a
national securities exchange or included for quotation on Nasdaq, CPA(R):14 will
generally begin selling properties within eight years after the proceeds of its
public offerings are substantially invested, subject to market conditions. The
board of directors will make the decision whether to list the shares, liquidate
or devise an alternative liquidity strategy which is likely to result in the
greatest value for the shareholders.
-7-
COMPETITION
CPA(R):14 faces competition for the acquisition of office and industrial
properties in general, and such properties net leased to major corporations in
particular, from insurance companies, credit companies, pension funds, private
individuals, investment companies and other REITs. CPA(R):14 also faces
competition from institutions that provide or arrange for other types of
commercial financing through private or public offerings of equity or debt or
traditional bank financings. CPA(R):14 believes its management's experience in
real estate, credit underwriting and transaction structuring will allow
CPA(R):14 to compete effectively for office and industrial properties.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. CPA(R):14's leases often
provide that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.
CPA(R):14 typically undertakes an investigation of potential environmental risks
when evaluating an acquisition. Phase I environmental assessments are performed
by independent environmental consulting and engineering firms for all properties
acquired by CPA(R):14. Where warranted, Phase II environmental assessments are
performed. Phase I assessments do not involve subsurface testing, whereas Phase
II assessments involve some degree of soil and/or groundwater testing. CPA(R):14
may acquire a property which is known to have had a release of hazardous
materials in the past, subject to a determination of the level of risk and
potential cost of remediation. CPA(R):14 normally requires property sellers to
indemnify it fully against any environmental problem existing as of the date of
purchase. Additionally, CPA(R):14 often structures its leases to require the
tenant to assume most or all responsibility for compliance with the
environmental provisions of the lease or environmental remediation relating to
the tenant's operations and to provide that non-compliance with environmental
laws is a lease default. In some cases, CPA(R):14 may also require a cash
reserve, a letter of credit or a guarantee from the tenant, the tenant's parent
company or a third party to assure lease compliance and funding of remediation.
The value of any of these protections depends on the amount of the collateral
and/or financial strength of the entity providing the protection. Such a
contractual arrangement does not eliminate CPA(R):14's statutory liability or
preclude claims against CPA(R):14 by governmental authorities or persons who are
not a party to the arrangement. Contractual arrangements in CPA(R):14's leases
may provide a basis for CPA(R):14 to recover from the tenant damages or costs
for which it has been found liable.
INDUSTRY SEGMENT
CPA(R):14 operates in one industry segment, investment in net leased real
property. For the year ended December 31, 2002, no lessee represented 10% or
more of the total operating revenue of CPA(R):14.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") became effective in December 1995. The Act provides a "safe harbor" for
companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
CPA(R):14 wishes to take advantage of the "safe harbor" provisions of the Act
and is therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
CPA(R):14's future results may be affected by certain risks and uncertainties
including the following:
-8-
We are subject to the risks of real estate ownership which could reduce the
value of our properties.
Our properties may include net leased industrial and commercial property. The
performance of CPA(R):14 is subject to risks incident to the ownership and
operation of these types of properties, including:
- changes in the general economic climate;
- changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
- changes in interest rates and the availability of financing;
- competition from other available space; and
- changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
We may have difficulty selling or re-leasing our properties.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. Many of the
net leases we enter into or acquire are for properties that are specially suited
to the particular needs of our tenant. With these properties, if the current
lease is terminated or not renewed, we may be required to renovate the property
or to make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, we may have
difficulty selling it to a party other than the tenant due to the special
purpose for which the property may have been designed. In addition, provisions
of the Internal Revenue Code relating to REITs limit our ability to sell
properties held for fewer than four years. These and other limitations may
affect our ability to sell properties without adversely affecting returns to our
shareholders.
The inability of a tenant in a single tenant property to pay rent will reduce
our revenues
Most of our properties are occupied by a single tenant and, therefore, the
success of our investments are materially dependent on the financial stability
of our tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and cause us
to have to find an alternative source of revenue to meet the mortgage payment
and prevent a foreclosure if the property is subject to a mortgage. In the event
of a default, we may experience delays in enforcing our rights as landlord and
may incur substantial costs in protecting our investment and reletting our
property. If a lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell the property
without incurring a loss.
The bankruptcy of tenants would cause a reduction in revenue.
A tenant in bankruptcy could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms providing for the repurchase of a property by the
tenant, a bankruptcy court could recharacterize a net lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor.
Some of the programs managed by Carey Asset Management Corp. or its affiliates
have had tenants file for bankruptcy protection and are involved in litigation.
Four CPA(R) programs had to reduce the rate of distributions to their partners
as a result of adverse developments involving tenants.
If our tenants are highly leveraged, they may have a higher possibility of
filing for bankruptcy. Of tenants that experience downturns in their operating
results due to adverse changes to their business or economic conditions, those
that are highly leveraged may have a higher possibility of filing for
bankruptcy. In bankruptcy, a tenant has the option of vacating a property
instead of paying rent. Until such a property is released from bankruptcy, our
revenues
-9-
would be reduced and could cause us to reduce distributions to shareholders. We
have highly leveraged tenants at this time, and we may have additional highly
leveraged tenants in the future.
Our tenants generally do not have a recognized credit rating, which may create a
higher risk of lease defaults and therefore lower revenues than if our tenants
had a recognized credit rating.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose a higher risk of default than would long term leases with tenants
whose credit potential has already been recognized by the market.
There is not, and may never be a public market for our shares, so it will be
difficult for shareholders to sell shares quickly.
There is no current public market for the shares and, therefore, it will be
difficult for shareholders to sell their shares promptly. In addition, the price
received for any shares sold is likely to be less than the proportionate value
of the real estate we own.
Our success will be dependent on the performance of W. P. Carey & Co.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of W. P. Carey & Co. in the acquisition of
investments, the selection of tenants, the determination of any financing
arrangements, and upon the management of the assets. You will have no
opportunity to evaluate the terms of transactions or other economic or financial
data concerning our investments. You must rely entirely on the management
ability of W. P. Carey & Co. and the oversight of the board of directors.
W. P. Carey & Co. may be subject to conflicts of interest.
W. P. Carey & Co. manages our business and selects our real estate investments.
W. P. Carey & Co. has some conflicts of interest in its management of CPA(R):14,
which arise primarily from the involvement of W. P. Carey & Co. and its
affiliates in other activities that may conflict with CPA(R):14 and the payment
of fees by us to W. P. Carey & Co. and its affiliates. The activities in which a
conflict could arise between CPA(R):14 and W. P. Carey & Co. are:
- - the receipt of commissions, fees and other compensation by W. P. Carey &
Co. and its affiliates for property purchases, leases, sales and financing
for CPA(R):14, which may cause W. P. Carey & Co. and its affiliates to
engage in transactions that generate higher fees, rather than transactions
that are more appropriate or beneficial for our business;
- - agreements between CPA(R):14 and W. P. Carey & Co. or any of its
affiliates, including agreements regarding compensation of W. P. Carey &
Co. and its affiliates, will not be negotiated on an arm's length basis as
would occur if the agreements were with unaffiliated third parties;
- - purchases and loans from affiliates, subject to CPA(R):14's investment
procedures, objectives and policies, which will increase fees and interest
payable to affiliates, thereby decreasing our net income and possibly
causing us to incur higher leverage levels;
- - competition with certain affiliates for property acquisitions, which may
cause W. P. Carey and its affiliates to direct properties suitable for us
to other related entities;
- - disposition, incentive and termination fees, which are based on the sale
price of properties, may cause a conflict between the advisor's desire to
sell a property and our plans to hold or sell the property.
Inherent in these transactions is the conflict of interest that arises due to
the potential impact of the transaction on the amount of fees received by W. P.
Carey & Co. and/or its affiliates and the distributions to shareholders.
Liability for uninsured losses could adversely affect our financial condition.
Losses from disaster-type occurrences (such as wars or earthquakes) may be
either uninsurable or not insurable on economically viable terms. Should an
uninsured loss occur, we could lose our capital investment and/or anticipated
profits and cash flow from one or more properties.
Potential liability for environmental matters could adversely affect our
financial condition.
We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. Some of these
laws could impose the following on CPA(R):14:
- Responsibility and liability for the cost of removal or remediation of
hazardous substances released on our property, generally without regard
to our knowledge or responsibility of the presence of the contaminants.
-10-
- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of these substances.
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
Our costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to borrow using
the property as collateral.
Our use of debt to finance acquisitions could adversely affect our cash flow.
Most of our property acquisitions will be made by borrowing a portion of the
purchase price of our properties and securing the loan with a mortgage on the
property. If we are unable to make our debt payments as required, a lender could
foreclose on the property or properties securing its debt. This could cause us
to lose part or all of our investment which in turn could cause the value of the
shares and distributions to shareholders to be reduced. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity
invested in the property. We typically borrow between 55% and 65% of the
purchase price of our properties. There is no limitation on the amount borrowed
on a single property and the aggregate borrowings may not exceed 75% of the
value of all properties. Any borrowings in excess of 75% of the value of all
properties must be approved by a majority of the independent directors and
disclosed to shareholders. As of December 31, 2002, we had limited recourse
mortgage notes payable outstanding of $666,740,233.
Failure to qualify as a REIT could adversely affect our operations and ability
to make distributions.
If we fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to shareholders
because of the additional tax liability. In addition, distributions to
shareholders would no longer qualify for the distributions paid deduction and we
would no longer be required to make distributions. We might be required to
borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and
various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize
our REIT status.
The Internal Revenue Service may take the position that specific sale-leaseback
transactions we will treat as true leases are not true leases for federal income
tax purposes but are, instead, financing arrangements or loans. If a
sale-leaseback transaction were so recharacterized, we might fail to satisfy the
Asset Tests or the Income Tests and consequently lose our REIT status effective
with the year of recharacterization. Alternatively, the amount of our REIT
Taxable Income could be recalculated which could cause us to fail the
Distribution Test.
Balloon payment obligations may adversely affect our financial condition.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets. There are no balloon payments scheduled over the next
five years.
A limit on the number of shares a person may own may discourage a takeover.
Our articles of incorporation restrict ownership of more than 9.8% of the
outstanding shares by one person. These restrictions may discourage a change of
control of CPA(R):14 and may deter individuals or entities from making tender
offers for shares, which offers might be financially attractive to shareholders
or which may cause a change in the management of CPA(R):14.
Maryland law could restrict change in control.
Provisions of Maryland law applicable to us prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting power of
outstanding shares;
-11-
- an affiliate of us who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of the
voting power of our outstanding shares ("an interested shareholder");
or
- an affiliate of an interested shareholder.
These prohibitions last for five years after the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in shareholders' interest. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of directors prior to the time that
someone becomes an interested shareholder.
Our participation in joint ventures creates additional risk.
We participate in joint ventures with other entities, some of which may be
unaffiliated with us. There are additional risks involved in these types of
transactions. These risks include the potential of our joint venture partner
becoming bankrupt and the possibility of diverging or inconsistent economic or
business interests of us and our partner. These diverging interests could result
in, among other things, exposing us to liabilities of the joint venture in
excess of our proportionate share of these liabilities. The partition rights of
each owner in a jointly owned property could reduce the value of each portion of
the divided property. In addition, the fiduciary obligation that W. P. Carey &
Co. or our board may owe to our partner in an affiliated transaction may make it
more difficult for us to enforce our rights.
In some of our joint venture relationships with publicly registered investment
programs or other entities sponsored by Carey Asset Management Corp. or one of
its affiliates, we enter into investments as tenants-in-common. This poses risks
in addition to those mentioned above. The partition rights of each co-tenant in
a tenancy-in-common could reduce the value of each portion of the divided
property. In addition, the fiduciary obligation that Carey Asset Management
Corp. or our board may owe to our partner in an affiliated transaction may make
it more difficult for us to enforce our rights.
International investments involve additional risks.
We own properties in the United Kingdom, France, the Netherlands and Finland and
we may purchase additional property located outside the United States. These
investments may be affected by factors peculiar to the laws of the jurisdiction
in which the property is located. These laws may expose us to risks that are
different from and in addition to those commonly found in the United States.
Foreign investments could be subject to the following risks:
- changing governmental rules and policies;
- enactment of laws relating to the foreign ownership of property and
laws relating to the ability of foreign persons or corporations to
remove profits earned from activities within the country to the
person's or corporation's country of origin;
- variations in the currency exchange rates;
- adverse market conditions caused by changes in national or local
economic conditions;
- changes in relative interest rates;
- change in the availability, cost and terms of mortgage funds resulting
from varying national economic policies;
- changes in real estate and other tax rates and other operating expenses
in particular countries;
- changes in land use and zoning laws; and
- more stringent environmental laws or changes in such laws.
We may incur costs to finish build-to-suit properties.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Oftentimes,
completion risk, cost overruns and on-time delivery are the obligations of the
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process we may be required to incur project costs to complete all or part of the
project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio returns.
-12-
Item 2. Properties.
Set forth below is certain information relating to CPA(R):14's properties owned
as of December 31, 2002.
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------------------------------------------------------------------------------------------------------------
CARREFOUR FRANCE, SAS(3)
Boe, Carpiquet, Le Mans,
Vendin-le-Vieil, Lagnieu,
Luneville, and 100% 3,533,075 $2.43 $8,581,383(4) INSEE(5) Mar. 2011 None
St. Germain du Puy,
France
Lieusaint, France 100% 100,561 15.85 1,593,708(4) INSEE(5) Jun. 2011 None
--------- ----------
Total: 3,633,636 10,175,091
PETSMART, INC.(3)
Phoenix, AZ; Westlake
Village, CA; Boca
Raton, Lake Mary, 70% interest
Tallahassee,Plantation, in two limited
FL; Evanston,IL; partnerships
Braintree, MA; Oxon owning land and 946,177 10.97 7,262,677 Stated Nov. 2021 Nov. 2041
Hill, MD; Flint, MI; buildings(5)
Fridley, MN; Dallas,
Southlake, TX
NORTEL NETWORKS LIMITED(3)
Richardson, TX 100% 281,758 18.77 5,287,500 Stated Dec. 2016 Dec. 2036
ATRIUM COMPANIES, INC.(3)
Dallas and
Greenville, TX 100% 823,713 2.52 2,075,000 CPI Jul. 2020 Jul. 2030
Welcome, NC;
Murrysville, PA;
Wylie, TX 100% 774,952 3.47 2,690,247 CPI Nov. 2021 Nov. 2031
--------- ---------
Total: 1,598,665 4,765,247
CLEAR CHANNEL
COMMUNICATIONS, INC.(3)
40% interest in a
limited partnership
New York, NY owning land and 227,685 47.94 4,365,725 Stated Sep. 2020 Sep. 2040
buildings
ADVANCE PARADIGM, INC.(3)
Scottsdale, AZ 100% 354,888 12.12 4,300,000 None Sep. 2021 Sep. 2051
TRUSERV CORPORATION(3)
Kingman, AZ;
Springfield,OR; 35% interest in
Fogelsville, PA; three limited
Jonesboro, GA; Kansas partnerships owning 3,443,100 3.49 4,202,503 Stated Dec. 2022 Nov. 2042
City, MI; Woodland, land and buildings
CA; Corsicana, TX
FEDERAL EXPRESS
CORPORATION(3)
60% interest in a
limited liability 394,406 16.66 3,943,400 CPI Aug. 2019 Aug. 2039
Collierville, TN company owning land
and building
-13-
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------------------------------------------------------------------------------------------------------------
TOWER AUTOMOTIVE(3)
Granite City, IL;
Clinton Township, MI;
Kendallville, IN; 100% 1,047,400 3.72 3,895,125 CPI Apr. 2020 Apr. 2040
Upper Sandusky, OH
KATUN CORPORATION(3)
Davenport, IA; 100% 343,423 8.65 2,971,350 CPI Jul. 2022 Jul. 2042
Bloomington, MN
Gorinchem, NT 100% 133,500 5.32 710,100(4) CPI Jul. 2022 Jul. 2042
------- ---------
476,923 3,681,450
GALYAN'S TRADING COMPANY(3)
Kennesaw, GA;
Plainfield, IN; 100% 401,252 8.52 3,417,853 Stated Dec. 2020 Dec. 2060
Leawood, KS
COLLINS & AIKMAN
CORPORATION(3)
Manchester, MI;
Albemarle, Farmville and
Old Fort, NC; 100% 1,791,832 1.83 3,277,620 CPI Sep. 2021 Sep. 2041
Holmesville, OH;
Springfield, TN
ADVANCED MICRO DEVICES,
INC.(3)
33 1/3% interest in
a limited liability
Sunnyvale, CA company owning land 361,965 27.01 3,258,938 CPI Dec. 2018 Dec. 2038
and buildings
METALDYNE COMPANY LLC(3)
Rome, GA; Niles, IL;
Plymouth, MI; Solon and 100% 534,501 5.92 3,164,102 CPI Jun. 2021 Jun. 2041
Twinsburg, OH
APPLIED MATERIALS,
INC.(ETEC SYSTEMS, INC.)(3)
49.99% interest in
a building owned by
Hayward, CA a limited liability 202,663 30.60 3,099,771 CPI Sep. 2014 Jan. 2030
company
APW NORTH AMERICA, INC.(3)
Monon, IN; Champlin, MN;
Robbinsville, NJ; 100% 816,665 3.39 2,769,899 CPI May 2017 May 2027
North Salt Lake City, UT;
Radford, VA
PERKINELMER, INC.(3)
Turku, Finland 100% 266,310 10.38 2,764,247(4) CPI Dec. 2021 Dec. 2036
AMERIX CORP.(3)
Columbia, MD 100% 160,000 15.36 2,457,833 CPI Feb. 2017 Feb. 2017
CELESTICA CORPORATION(3)
Rochester, MN 100% 200,000 10.97 2,193,900 Stated Jul. 2016 Jul. 2026
-14-
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------------------------------------------------------------------------------------------------------------
BUFFETS, INC.(3)
Eagan, MN 100% 99,342 21.93 2,178,163 CPI Sep. 2020 Sep. 2040
GERBER SCIENTIFIC, INC.(3)
South Windsor (2) and 100% 347,500 6.09 2,117,750 CPI Jul. 2018 Jul. 2038
Manchester, CT
CHECKFREE HOLDINGS, INC.(3)
50% interest in a
limited liability 220,676 19.10 2,107,991 CPI Dec. 2015 Dec. 2015
Norcross, GA company owning land
and building
STELLEX TECHNOLOGIES, INC,(3)
Valencia, CA; 100% 253,889 7.81 1,983,646 CPI Feb. 2020 Feb. 2040
North Amityville, NY
SPECIAL DEVICES, INC.(3)
Moorpark, CA; Mesa, AZ 50% 249,276 15.74 1,962,000 CPI Jun. 2021 Jun. 2041
BEST BUY CO., INC.
Torrance, CA 100% 103,686 18.78 1,946,930 Stated Jan. 2005 Jan. 2010
McLANE COMPANY, INC.(3)
60% interest in a
Shawnee, KS; Burlington, two limited liability 529,602 6.06 1,924,484 CPI Dec. 2020 Dec. 2040
NJ; Manassas, VA companies owning land
and buildings
NEXPAK CORPORATION(3)
Duluth, GA 100% 221,374 5.93 1,313,000 CPI Mar. 2021 Mar. 2041
Helmond, The Netherlands 100% 117,000 5.04 589,915(4) CPI Jun. 2021 Jun. 2041
------- ----------
338,374 1,902,915
INSTITUTIONAL JOBBERS
COMPANY(3)
Valdosta, GA; 100% 411,417 4.61 1,894,789 Stated Dec. 2019 Dec. 2028
Johnson City, TN
BUILDERS FIRSTSOURCE, INC.(3)
Harrisburg, NC 100% 178,000 5.79 1,030,492 CPI Jun. 2020 Jun. 2030
60% interest in a
limited partnership
Norcross, GA; Elkwood, owning land and
VA; Cincinnati, OH buildings 389,261 3.56 830,626 CPI Dec. 2016 Dec. 2036
------- ----------
Total: 567,261 1,861,118
WADDINGTON NORTH AMERICA, INC.(3)
City of Industry, CA;
Florence, KY; Chemsford,
MA; Lancaster, TX 100% 369,870 4.89 1,810,500 CPI Apr. 2021 Apr. 2041
GIBSON GUITAR CORP.(3)
85% interest in two
Bozeman, MT; Elgin, IL; limited partnerships 336,721 6.20 1,774,290 CPI Mar. 2021 Mar. 2031
Nashville, TN (2) owning land and
buildings
-15-
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------------------------------------------------------------------------------------------------------------
AMERICAN TIRE DISTRIBUTORS,
INC. (FORMERLY HEAFNER TIRE
GROUP, INC.)(3)
Mauldin, SC; Charloette, 100% 465,588 3.53 1,644,500 CPI Mar. 2022 Mar. 2042
NC; Lincolnton, NC
PW EAGLE, INC.(3)
Tacoma, WA; West Jordan,
UT; Perris, CA; Eugene, 100% 1,079,424 1.46 1,578,875 CPI Feb. 2022 Feb. 2042
OR
NEW CREATIVE ENTERPRISES,
INC.(3) Milford, OH 100% 437,000 3.61 1,576,200 CPI Sep. 2021 Sep. 2041
CONSOLIDATED THEATERS
HOLDING, G.P.(3)
Midlothian, VA 100% 88,730 17.48 1,550,667 Stated Aug. 2020 Aug. 2030
COMPUCOM SYSTEMS, INC.(3)
33 1/3% interest in
a limited liability 255,351 16.54 1,408,043 CPI Apr. 2019 Apr. 2029
Dallas, TX company owning land
and building
RAVE REVIEWS CINEMAS, L.L.C.
Pensacola, FL 100% 58,916 11.82 696,417 CPI May 2021 May 2041
Port St. Lucie, FL 100% 53,104 13.34 708,406 CPI Jun. 2021 Jun. 2041
------- ---------
Total: 112,020 1,404,823
PRODUCTION RESOURCE GROUP
LLC(3)
Las Vegas, NV 100% 127,796 7.37 941,773 CPI Mar. 2014 Mar. 2024
Burbank and
Los Angeles, CA 100% 49,374 8.49 419,205 CPI Oct. 2014 Oct. 2024
------- ----------
Total: 177,170 1,360,978
FITNESS HOLDINGS, INC.(3)
Salt Lake City, UT 100% 36,851 16.15 595,140 CPI May 2020 May 2035
St. Charles, MO(3) 100% 38,432 18.77 721,526 CPI Dec. 2020 Dec. 2035
------ ----------
Total: 75,283 1,316,666
UTI HOLDINGS, INC. AND NASCAR
TECHNICAL INSTITUTE, INC.
Mooresvile, NC 100% 144,995 8.69 1,260,230 Stated Sep. 2022 Sep. 2043
THE BON-TON DEPARTMENT
STORES, INC.(3)
York, PA (2) 100% 301,337 4.18 1,259,250 CPI Dec. 2020 Dec. 2050
BARJAN PRODUCTS L.L.C.(3)
Rock Island, IL 100% 241,950 5.13 1,242,364 Stated Oct. 2016 Oct. 2026
TEXTRON, INC.(3)
50% interest in a
limited liability
Gilbert, AZ company owning land 243,370 10.19 1,239,739 CPI Jan. 2019 Jan. 2039
and building
METAGENICS, INC.
San Clemente, CA 100% 88,070 13.96 1,229,879 Stated Aug. 2011 Aug. 2021
TRANSCORE HOLDINGS INC.(3)
Albuquerque, NM 100% 74,747 15.98 1,194,109 Stated Sep. 2015 Sep. 2030
-16-
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------------------------------------------------------------------------------------------------------------
LINCOLN TECHNICAL INSTITUTE,
INC.(3)
Union, NJ; Grand
Prairie, TX; Allentown 100% 158,202 7.42 1,174,035 CPI Dec. 2016 Dec. 2016
and Philadelphia, PA
MERIDIAN AUTOMOTIVE SYSTEMS,
INC.(3)
Salisbury, NC 100% 333,830 3.44 1,146,823 Stated Sep. 2021 Sep. 2041
BLP GROUP PLC(3)
Doncaster, South 100% 225,998 4.12 930,552(4) Stated Jan. 2031 Jan. 2031
Yorkshire, United Kingdom
TOWNE HOLDINGS, INC.(3)
Elk Grove Village, IL 100% 46,672 18.69 872,330 CPI Oct. 2020 Oct. 2040
INTERNATIONAL GARDEN
PRODUCTS, INC.(3)
Lakewood, NJ 100% 220,520 3.89 857,964 CPI Dec. 2021 Dec. 2031
BURLINGTON MOTOR CARRIERS,
INC.
Daleville, IN 100% 106,352 7.84 833,342 CPI Jun. 2018 Jun. 2028
FLEMING COMPANIES, INC.(3)
60% interest in a
limited liability
Grand Rapids, MI company owning land 179,462 6.93 745,753 Stated Jul. 2006 Jul. 2026
and bulding
SCOTT COMPANIES, INC.(3)
Gardena, CA 100% 88,793 8.30 737,134 CPI Aug. 2019 Aug. 2034
LENNAR CORPORATION(3)
Houston, TX 100% 52,144 13.73 715,750 CPI Oct. 2015 Oct. 2035
BRASHEAR LP(3)
Pittsburgh, PA 100% 146,103 4.79 699,200 CPI Dec. 2013 Dec. 2023
EARLE M. JORGENSEN COMPANY(3)
Kansas City, MO 100% 120,855 5.19 627,059 CPI Mar. 2020 Mar. 2040
McCOY, INC.(3)
90% interest in a
limited partnership
Houston, TX owning land and 140,000 4.26 536,760 Stated Sep. 2007 Sep. 2007
building
WEST UNION CORPORATION(3)
Tempe, AZ 100% 116,922 4.55 532,350 Stated Jan. 2015 Jan. 2035
NEWPARK RESOURCES, INC.
Lafayette, LA 100% 34,893 10.80 376,688 CPI Nov. 2017 Nov. 2027
VARIOUS TENANTS(3)
85% interest in a
limited partnership Mar. 2003 Mar. 2003
Nashville, TN owning land and 35,994 4.58 140,020 Stated through through
building Oct. 2006 Oct. 2006
-17-
SHARE OF
RENT PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT RENTS(2) FACTOR TERM TERM
- ------------------------------------------------------------------------------------------------------------------------------------
BIG O DEVELOPMENT, INC.
Torrnance, CA 100% 4,500 22.80 102,600 CPI Jun. 2012 Jun. 2022
CAREER EDUCATION CORPORATION
Upper Saucon
Township, PA 100% 96,274 Under Construction(6) CPI Jul. 2023 Jul. 2043
WASATCH SUMMIT
Lindon, UT 100% 20,100 Under Construction(6) CPI Jun. 2012 Jun. 2022
VACANT
Daleville, IN; 100% 106,352
Nashville, TN 100% 17,279
North Amityville, NY 100% 28,000
1. Percentage of ownership in land and building, except as noted. Fee
simple ownership interest unless otherwise no ted.
2. Share of Current Annual Rents is the product of the Square
Footage, the Rent per Square Foot, and the Ownership Interest
percentage.
3. These properties are encumbered by mortgage notes payable.
4. Based on exchange rates at December 31, 2002.
5. INSEE construction index, an index published quarterly by the
French Government.
6. Annual Rent will be based on value of tenant improvements upon
completion.
Item 3. Legal Proceedings.
As of the date hereof, CPA(R):14 is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2002 to a vote of security holders, through the solicitation of proxies or
otherwise.
-18-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to CPA(R):14's common equity is hereby incorporated by
reference to page 30 of CPA(R):14's Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of
CPA(R):14's Annual Report contained in appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 2 to 10 of CPA(R):14's Annual Report contained in Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
Approximately $645,793,000 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 December 31, 2002 ranged
from 6.09% to 8.85%. The interest rate on the variable rate debt as of December
31, 2002 ranged from 3.38% to 8.54%.
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 8,786 $ 9,474 $ 10,394 $ 11,262 $ 12,126 $ 593,751 $645,793 $660,764
Weighted average
interest rate 7.40% 7.39% 7.38% 7.38% 7.49% 7.63%
Variable rate debt $ 350 $ 373 $ 390 $ 401 $ 414 $ 19,019 $ 20,947 $ 20,947
CPA(R):14 conducts business in the United Kingdom, Finland, France and The
Netherlands. The foreign operations were not significant to CPA(R):14's
consolidated financial position, results of operations or cash flows during the
three-year period ended December 31, 2002. Additionally, foreign currency
translation gains and losses were not material to our financial condition for
the three-year period ended December 31, 2002. Accordingly, we were not subject
to material foreign currency exchange rate risk from the effects that exchange
rate movements of foreign currencies may have on our future costs or on future
cash flows we may receive from our foreign subsidiaries. To date, we have not
entered into any foreign currency forward exchange contracts to hedge the
effects of adverse fluctuations in foreign currency exchange rates. One lease
provides CPA(R):14 the option to receive up to $77,500 of its rents in U.S.
dollars or the functional local currency. Under accounting principles generally
accepted in the United States, this option is considered a derivative
instrument. Scheduled future minimum rents, exclusive of renewals, under
non-cancelable leases resulting from CPA(R):14's foreign operations are as
follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Rental income(1) $14,269 $14,269 $14,269 $14,269 $14,269 $ 91,016 $162,361
Interest income from direct
financing leases(1) 931 1,017 1,017 1,017 1,111 36,062 41,155
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2002 and thereafter are as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Fixed rate debt (1) $ 2,836 $ 3,131 $ 3,450 $ 3,757 $ 4,014 $ 94,802 $111,990
Variable rate debt(1) 70 75 79 85 91 5,585 5,985
(1) Based on December 31, 2002 exchange rate. The mortgage notes are
denominated in the functional currency of the country of each property.
-19-
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data of
CPA(R):14 are hereby incorporated by reference to pages 11 to 31 of CPA(R):14's
Annual Report contained in Appendix A:
(i) Report of Independent Accountants
(ii) Consolidated Balance Sheets at December 31, 2001 and 2002.
(iii) Consolidated Statements of Income for the years ended December 31, 2002,
2001, and 2000.
(iv) Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2000, 2001, and 2002.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001, and 2000.
(vi) Notes to Consolidated Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
-20-
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of
CPA(R):14's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of
CPA(R):14's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of
CPA(R):14's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
CPA(R):14's fiscal year, and is hereby incorporated by reference.
-21-
PART IV
Item 14. Controls and Procedures
The Co-Chief Executive Officers and Chief Financial Officer of the Company
have conducted a review of the Company's disclosure controls and procedures
as of December 31, 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 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 chief executive officers and chief
financial officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act)
are sufficiently effective to ensure that the information required to be
disclosed by the Company in the reports it files under the Exchange Act is
recorded, processed, summarized and reported with adequate timeliness.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referred to above.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a part
of this Report:
Report of Independent Accountants.
Consolidated Balance Sheets, December 31, 2002 and 2001.
Consolidated Statements of Income for the years ended December
31, 2002, 2001, 2000.
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 2000, 2001, and 2002.
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by
reference to pages 11 to 31 of CPA(R):14's Annual Report contained
in Appendix A.
(a) 2. Financial Statement Schedule:
The following schedules are filed as a part of this Report:
Report of Independent Accountants.
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 2002.
Schedule III of Registrant is contained on pages 32 to 38 of this
Form 10-K.
Financial Statement Schedules other than those listed above are
omitted because the required information is given in the
Consolidated Financial Statements, including the Notes thereto, or
because the conditions requiring their filing do not exist.
-22-
(a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents
other than those designated as being filed herewith are incorporated
herein by reference.
Exhibit
No. Description Method of Filing
---- ----------- ----------------
3.1 Articles of Amendment and Restatement. Exhibit 3(A) to Registration Statement
(Form S-11) No. 333-76761
3.1(2) Amended and Restated Articles of Incorporation of Registrant Exhibit 3.1(1) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
3.2 Amended Bylaws of Registrant. Exhibit 3(B) to Registration Statement
(Form S-11) No. 333-31437
3.2(2) Form of Bylaws of Registrant Exhibit 3.2(2) to Post-Effective
Amendment No. 1 dated April 28, 2000
3.2(3) Form of Bylaws of Registrant Exhibit 3.2(2) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
4.1 Dividend Reinvestment and Share Purchase Plan Exhibit 4.1 to Registrant's Form S-3D
dated July 22, 2002
5.1 Opinion of Reed Smith LLP Exhibit 5.1 to Registrant's Form S-3D
dated July 22, 2002
8.1(3) Opinion of Reed Smith LLP as to certain tax matters Exhibit 8.1 to Registrant's Form S-3D
dated July 22, 2002
10.1 Amended Advisory Agreement. Exhibit 10.1 to Registration Statement
(Form S-11) No. 333-31437
10.1(2) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.1 to Registrant's Form 8-K
QRS 14-4, as Landlord, and Best Buy Co. Inc., as Dated February 2, 1999
Tenants.
10.2 Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.1 to Registrant's Form 8-K
QRS 14-4, as Landlord, and Best Buy Co. Inc., as dated February 2, 1999
Tenants.
10.2(2) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2 (2) to Registration
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Statement (Form S-11) No. 333- 76761
10.2(3) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2 (3) to Registrant's Form
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Post AM dated April 19, 1999
10.2(4) Lease Agreement date July 27, 19998 by and between Best (CA) Exhibit 10.2 to Registrant's Form 10-k
QRS 14-4, as Landlord, and Best Buy Co. Inc. as for the year ended December 31, 1998,
Tenants. dated March 30, 1999
-23-
Exhibit
No. Description Method of Filing
---- ----------- ----------------
10.2(5) Lease Agreement dated February 3, 1998 by and between ESI Exhibit 10.2 to Registrant's Form 8-K
(CA) QRS 12-6 INC., as Landlord and Etec Systems, Inc. as dated February 2, 1999
Tenants.
10.2(6) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2(3) to Registrant's
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Post-Effective Amendment No. 1 dated
April 28, 2000
10.2(7) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2(3) to Registrant's
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Post-Effective Amendment No. 2 dated
November 22, 2000
10.3(2) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(2) to Registration
(CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Statement (Form S-11) No 333- 76761
Tenants.
10.3(4) Lease Agreement dated February 3, 1998 by and between ESI Exhibit 10.3 to Registrant's Form 10-K
(CA) QRS 12-6 Inc., as Landlord and ETEC Systems, Inc., as for the year ended December 31, 1998
Tenants. dated March 30, 1999
10.3(5) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.3 to Registrant's form 8-K
QRS 14-16, as Landlord, and Metagenics Incorporated, as dated February 2, 1999
Tenants.
10.3(6) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(3) to Registrant's
(CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
10.3(7) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(3) to Registrant's
(CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.4 Lease Agreement dated July 29, 1998 by and between META Exhibit 10.3 to Registrant's Form 8-K
(CA) QRS 14-16, as Landlord, and Metagenics Incorporated, dated February 2, 1999
as Tenants.
10.4(2) Lease Agreement dated July 29, 1998 by and between META (CA) Exhibit 10.4(2) to Registration
QRS 14-16, as Landlord, and Metagenics Incorporated, as Statement (Form S-11) No. 333- 76761
Tenants.
10.4(3) Lease Agreement dated July 29, 1998 by and between META (CA) Exhibit 10.4 (3) to Registrant's Post
QRS 14-16, as Landlord, and Metagenics Incorporated, as Effective Amendment No. 2 to Form S-11
Tenants. dated April 19, 1999
10.4(4) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.4 to Registrant's Form 10K
QRS 14-16, as Landlord, and Metagenics Incorporated, as for the year ended December 31, 1999,
Tenants. dated March 30, 1999
10.4(5) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.4 to Registrant's Form 8-K
QRS 14-3, INC., as Landlord, and Burlington Motor Carrier as dated February 2, 1999
Tenant.
10.4(6) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.4(3) to Registrant's
QRS 14-16, as Landlord, and Metagenics Incorporated, as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
-24-
Exhibit
No. Description Method of Filing
---- ----------- ----------------
10.4(7) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.4(3) to Registrant's
QRS 14-16, as Landlord, and Metagenics Incorporated, as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.5(2) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5 (2) (Form S-11) No. 333-
QRS 14-3, as Landlord, and Burlington Motor Carrier Inc., as 76761
Tenants.
10.5(3) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5 to Registrant's Post
QRS 14-3, as Landlord, and Burlington Motor Carrier as Effective Amendment No. 2 dated April
Tenants. 19, 1999
10.5(4) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5 to Registrant's Form 10-K
QRS 14-3, INC., as Landlord, and Burlington Motor Carrier for the year ended December 31, 1998,
Inc., as Tenants. dated March 30, 1999
10.5(5) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.5 to Registrant's Form 8-k
(MO) QRS 14-10, Inc., as Landlord, and The Benjamin Ansehl dated February 2, 1999
Co., as Tenants
10.5(6) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5(3) to Registrant's
QRS 14-3, as Landlord, and Burlington Motor Carrier Inc., as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
10.5(7) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5(3) to Registrant's
QRS 14-3, as Landlord, and Burlington Motor Carrier Inc., as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.6 Lease Agreement dated December 22, 1998 by and between Exhibit 10.6 to Registrant's Form 8-K
Conductor (CA) QRS 14-11, Inc., as Landlord, and Advance dated February 2, 1999
10.6(2) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(2) to Registration
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Statement (Form S-11) No. 333- 76761
Tenants
10.6(3) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(3) to Registrant's Post
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Effective Amendment to Form S-11 Date
Tenants. April 19, 1999
10.6(5) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6 to Registrant's Form 10-K
(MO) QRS 14-10, Inc., as Landlord, and The Benjamin Ansehl for the year ended December 31, 1998,
Co., as Tenants. dated February 2,1999
10.6(6) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(3) to Registrant's
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
10.6(7) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(3) to Registrant's
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.7 Lease Agreement dated December 22, 1998 by and between Exhibit 10.6 to Registrant's Form 8-K
Conductor (CA) QRS 14-11, Inc., as Landlord, and Advance dated February 2, 1999
Micro Devices, Inc., as Tenants.
-25-
Exhibit
No. Description Method of Filing
---- ----------- ----------------
10.7(2) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 (2) to Registration
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Statement (Form S-11) No. 333- 76761
Devices, Inc., as Tenants.
10.7(3) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 (3) to Registrant's Post
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Effective Amendment No. 2 dated April
Devices, Inc., as Tenants. 19, 1999
10.7(4) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 to Registrant's Form 10-K
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro for year ended December 31, 1998, dated
Devices, Inc. as Tenants. March 30, 1999
10.7(5) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.7 to Registrant's Form 8-K,
(PA) QRS 14-12, Inc. as Landlord, and Contraves Brashear dated February 2, 1999
Systems L. P., as Tenants
10.7(6) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7(3) to Registrant's
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Post-Effective Amendment No. 1 dated
Devices, Inc. as Tenants. April 28, 2000
10.7(7) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7(3) to Registrant's
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Post-Effective Amendment No. 2 dated
Devices, Inc. as Tenants. November 22, 2000
10.8(2) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8 (2) to Registration (Form
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, S-11) No. 333- 76761
L.P., as Tenants.
10.8(3) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8 (3) to Registrant's Post
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, Effective Amendment to Form S-11 dated
L.P., as Tenants. April 19, 1999
10.8(4) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8(3) to Registrant's
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, Post-Effective Amendment No. 1 dated
L.P., as Tenants. April 28, 2000
10.8(5) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8(3) to Registrant's
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, Post-Effective Amendment No. 2 dated
L.P., as Tenants. November 22, 2000
10.28(4) Form of Sales Agency Agreement. Exhibit 10.28(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.28(5) Form of Sales Agency Agreement. Exhibit 10.28(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
10.29(4) Form of Selected Dealer Agreement. Exhibit 10.29(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.29(5) Form of Selected Dealer Agreement. Exhibit 10.29(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
-26-
Exhibit
No. Description Method of Filing
---- ----------- ----------------
10.30(1) Advisory Agreement. Exhibit 10.30(1) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.30(2) Advisory Agreement. Exhibit 10.30(1) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
10.31(4) Form of Wholesaling Agreement. Exhibit 10.31(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.31(5) Form of Wholesaling Agreement. Exhibit 10.31(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
10.32(4) Form of Escrow Agreement. Exhibit 10.32(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.32(5) Form of Escrow Agreement. Exhibit 10.32(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
21.1 Subsidiaries of Registrant as of March 20, 2003 Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
23.2 Consent of PricewaterhouseCoopers LLP Exhibit 23.2 to Registrant's Form S-3D
dated July 22, 2002
99.1 Certification of Chief Executive Officer Filed herewith
99.2 Certification of Chief Financial Officer Filed herewith
-27-
(b) Reports on Form 8-K
During the quarter ended December 31, 2002 the Registrant was not
required to file any reports on Form 8-K.
(c) Pursuant to Rule 701 of Regulation S-K, the use of proceeds through
December 31, 2002 from CPA(R):14's offering of common stock which
commenced November 17, 1999 (File # 333-76761) is as follows:
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: $ 29,021,322
Net offering proceeds to the issuer after
deducting expenses: $327,759,179
Purchases of real estate: $300,143,816
Working capital reserves: $ 3,635,369
Temporary investments in cash and cash equivalents: $ 23,979,994
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
a Maryland corporation
3/25/03 BY: /s/ John J. Park
- ------- ----------------------------------------
Date John J. Park
Managing Director and Chief Financial
Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
3/25/03 BY: /s/ William Polk Carey
- ------- ----------------------------------------
Date William Polk Carey
Chairman of the Board and Director
(Principal Executive Officer)
3/25/03 BY: /s/ Gordon F. DuGan
- ------- ----------------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board, Senior
Managing Director and Chief Acquisitions
Officer
3/25/03 BY: /s/ Gordon J. Whiting
- ------- ----------------------------------------
Date Gordon J. Whiting
President
3/25/03 BY: /s/ Elizabeth P. Munson
- ------- ----------------------------------------
Date Elizabeth P. Munson
Director
3/25/03 BY: /s/ William Ruder
- ------- ----------------------------------------
Date William Ruder
Director
3/25/03 BY: /s/ George E. Stoddard
- ------- ----------------------------------------
Date George E. Stoddard
Director
3/25/03 BY: /s/ Warren G. Wintrub
- ------- ----------------------------------------
Date Warren G. Wintrub
Director
3/25/03 BY: /s/ John J. Park
- ------- ----------------------------------------
Date John J. Park
Managing Director and Chief Financial
Officer (Principal Financial Officer)
3/25/03 BY: /s/ Claude Fernandez
- ------- ----------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting
Officer (Principal Accounting Officer)
-29-
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this annual report on Form 10-K of Corporate Property
Associates 14 Incorporated (the "Registrant");
2. Based on our knowledge, this annual 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 annual
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual 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 3/25/03 Date 3/25/03
/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)
-30-
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this annual report on Form 10-K of Corporate Property
Associates 14 Incorporated (the "Registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual 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 3/25/03
/s/ John J. Park
- ---------------------------
John J. Park
Chief Financial Officer
-31-
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Corporate Property Associates 14 Incorporated:
Our audits of the consolidated financial statements referred to in our report
dated March 20, 2003 appearing in the 2002 Annual Report to Shareholders of
Corporate Property Associates 14 Incorporated (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2003
-32-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Costs
Initial Cost to Company Capitalized
----------------------- Subsequent to Decrease in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- --------------- ----
Operating Method:
Vacant trucking facility
in Daleville, Indiana $ 2,100,000 $ 5,439,267 $ (3,810,000) $ 2,100,000
Retail store leased to
BestBuy Co., Inc. 13,059,980 6,933,851 $ 45,914 13,059,980
Research and development
facility leased to
Metagenics, Inc. 2,390,000 8,957,798 2,390,000
Manufacturing facility
leased to Brashear LP $ 3,981,955 620,000 6,186,283 620,000
Manufacturing and
distribution facilities leased
to Production Resource
Group L.L.C 7,412,525 3,860,000 8,263,455 3,860,000
Distribution and warehouse
facility leased to McLane
Company, Inc. 21,135,084 3,604,000 8,613,172 21,321,241 3,604,000
Distribution and warehouse
facility leased to Fleming
Companies, Inc. 5,886,174 740,000 3,042,828 7,543,357 740,000
Multiplex motion picture
theater leased to
Consolidated Theaters
Holding, G.P. 2,074,715 3,515,000 3,515,000
Office and warehouse
facility leased to Builders
FirstSource, Inc. 13,999,571 3,929,891 10,397,514 8,476,016 3,945,275
Office and research facility
leased to Amerix
Corporation 14,063,481 2,622,500 20,232,580 2,736,927 2,622,500
Industrial and manufacturing
facility leased to Atrium
Companies, Inc. 13,878,967 1,596,442 23,910,092 322,771 1,596,442
Retail and service facility
leased to Fitness Holdings,
Inc. 7,060,518 2,920,000 8,659,950 680,271 2,920,000
Life on which
Gross Amount at which Carried Depreciation in
at Close of Period Latest Statement
------------------ Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -------------
Operating Method:
Vacant trucking facility
in Daleville, Indiana $ 1,629,267 $ 3,729,267 $ 522,334 June 29, 1998 40 yrs.
Retail store leased to
BestBuy Co., Inc. 6,979,765 20,039,745 777,405 July 28, 1998 40 yrs.
Research and development
facility leased to
Metagenics, Inc. 8,957,798 11,347,798 723,322 July 29, 1998 40 yrs.
Manufacturing facility
leased to Brashear LP 6,186,283 6,806,283 625,072 December 28, 1998 40 yrs.
Manufacturing and
distribution facilities leased
to Production Resource March 31, 1999 and
Group L.L.C 8,263,455 12,123,455 753,068 October 15, 1999 40 yrs.
Distribution and warehouse
facility leased to McLane
Company, Inc. 29,934,413 33,538,413 2,136,696 August 18, 1999 40 yrs.
Distribution and warehouse
facility leased to Fleming
Companies, Inc. 10,586,185 11,326,185 823,855 August 18, 1999 40 yrs.
Multiplex motion picture
theater leased to
Consolidated Theaters
Holding, G.P. 3,515,000 September 22, 1999 N/A
Office and warehouse
facility leased to Builders June 29, 1999 and
FirstSource, Inc. 18,858,146 22,803,421 887,653 December 20, 2001 40 yrs.
Office and research facility
leased to Amerix
Corporation 22,969,507 25,592,007 1,700,390 November 1, 1999 40 yrs.
Industrial and manufacturing
facility leased to Atrium November 18, 1999 and
Companies, Inc. 24,232,863 25,829,305 892,395 December 1, 2001 40 yrs.
Retail and service facility
leased to Fitness Holdings, December 29, 1999 and
Inc. 9,340,221 12,260,221 537,883 December 28, 2000 40 yrs.
-33-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Costs
Initial Cost to Company Capitalized
----------------------- Subsequent to Decrease in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- ---------------- ----
Operating Method:
Office and research facility
leased to West Union
Corporation 3,289,682 940,000 4,557,382 12,498 940,000
Office and warehouse
facility leased to Barjan
Products, LLC 7,135,032 500,000 9,944,545 1,887,506 500,000
Industrial and manufacturing
facility leased to Stellex
Technologies, Inc. 13,159,089 2,932,000 16,397,988 17,904 2,932,000
Manufacturing and
distribution facility leased
to APW North America
Inc. 17,232,698 4,580,000 24,844,084 14,784 4,580,000
Distribution and warehouse
facility leased to Langeveld
International, Inc. 6,645,079 710,000 4,531,037 3,169,871 710,000
Retail and services facility
leased to Galyan's Trading
Company 19,303,705 7,330,000 22,305,554 4,177,399 7,830,000
Land leased to Advanced
Paradigm, Inc. 8,796,424 14,600,000 14,600,000
Industrial and manufacturing
facility leased to Transcore
Holdings, Inc. 3,444,049 1,490,000 4,635,655 7,176 1,490,000
Office and research facility
leased to Lennar
Corporation 4,932,629 570,000 6,759,843 570,000
Office and research facility
leased to Buffets, Inc. 11,469,001 4,225,000 15,518,481 1,420 4,225,000
Distribution and warehouse
facility leased to Earle M.
Jorgensen Company 3,751,577 570,000 5,869,790 39,219 570,000
Distribution and warehouse
facility leased to
Institutional Jobbers
Company 13,067,447 650,000 16,889,267 409,990 650,000
Land leased to Towne
Holdings, Inc. 2,340,872 4,100,000 4,100,000
Life on which
Gross Amount at which Carried Depreciation in
at Close of Period Latest Statement
------------------ Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Office and research facility
leased to West Union
Corporation 4,569,880 5,509,880 318,940 January 12, 2000 40 yrs.
Office and warehouse
facility leased to Barjan
Products, LLC 11,832,051 12,332,051 616,824 February 3, 2000 40 yrs.
Industrial and manufacturing
facility leased to Stellex
Technologies, Inc. 16,415,892 19,347,892 1,179,892 February 29, 2000 40 yrs.
Manufacturing and
distribution facility leased
to APW North America
Inc. 24,858,868 29,438,868 1,631,363 May 30, 2000 40 yrs.
Distribution and warehouse
facility leased to Langeveld
International, Inc. 7,700,908 8,410,908 422,196 June 29, 2000 40 yrs.
Retail and services facility
leased to
Galyan's Trading
Company 25,982,953 33,812,953 1,594,063 June 29, 2000 40 yrs.
Land leased to Advanced
Paradigm, Inc. 14,600,000 September 21, 2000 N/A
Industrial and manufacturing
facility leased to Transcore
Holdings, Inc. 4,642,831 6,132,831 265,995 September 25, 2000 40 yrs.
Office and research facility
leased to Lennar
Corporation 6,759,843 7,329,843 387,283 September 26, 2000 40 yrs.
Office and research facility
leased to Buffets, Inc. 15,519,901 19,744,901 889,143 September 28, 2000 40 yrs.
Distribution and warehouse
facility leased to Earle M.
Jorgensen Company 5,909,009 6,479,009 338,407 September 29, 2000 40 yrs.
Distribution and warehouse
facility leased to
Institutional Jobbers
Company 17,299,257 17,949,257 955,455 October 6, 2000 40 yrs.
Land leased to Towne
Holdings, Inc. 4,100,000 October 30, 2000 N/A
-34-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Costs
Initial Cost to Company Capitalized
----------------------- Subsequent to Decrease in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- ---------------- ----
Operating Method:
Office facility leased to
Newpark Resources, Inc. 2,521,864 660,000 3,004,921 660,000
Office and research facility
leased to Federal Express
Corporation 44,176,690 3,154,425 70,645,575 12,000 3,154,425
Retail, service, distribution
and warehouse facility
leased to The Bon-Ton
Stores, Inc. 7,367,483 1,974,000 10,067,885 2,900 1,974,000
Distribution and warehouse
facility leased to McCoy,
Inc. 4,089,776 1,025,000 4,530,120 9,419 1,025,000
Industrial and manufacturing
facility leased to Metaldyne
Company LLC 16,509,564 4,140,000 23,822,057 7,859 4,140,000
Retail and service facility
leased to Celestica
Corporation 12,288,174 3,348,824 9,275,468 8,941,752 3,348,824
Industrial and manufacturing
facility leased to Gerber
Scientific, Inc. 12,406,182 1,555,400 18,822,872 1,555,400
Industrial and manufacturing
facility leased to Meridian
Automotive Systems, Inc. 7,291,088 1,370,000 2,671,897 6,298,329 1,370,000
Industrial and manufacturing
facility leased to
Waddington North
America, Inc. 10,915,249 4,398,000 13,418,144 8,438 4,398,000
Industrial and manufacturing
facility leased to New
Creative Enterprises, Inc. 9,895,017 2,000,000 12,869,110 2,000,000
Retail and service facility
leased to Lincoln Technical
Institute, Inc. 6,213,243 2,486,384 7,601,852 2,486,384
Manufacturing and
distribution facility leased
to Gibson Guitar, Inc. 11,904,225 3,900,000 17,937,226 10,292 3,900,000
Life on which
Gross Amount at which Carried Depreciation in
at Close of Period Latest Statement
------------------ Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Office facility leased to
Newpark Resources, Inc. 3,004,921 3,664,921 153,376 December 1, 2000 40 yrs.
Office and research facility
leased to Federal Express
Corporation 70,657,575 73,812,000 6,538,776 December 6, 2000 7 - 40 yrs.
Retail, service, distribution
and warehouse facility
leased to The Bon-Ton
Stores, Inc. 10,070,785 12,044,785 514,168 December 27, 2000 40 yrs.
Distribution and warehouse
facility leased to McCoy,
Inc. 4,539,539 5,564,539 231,745 December 27, 2000 40 yrs.
Industrial and manufacturing
facility leased to Metaldyne June 29, 2000 and
Company LLC 23,829,916 27,969,916 1,010,452 August 16, 2001 40 yrs.
Retail and service facility
leased to Celestica
Corporation 18,217,220 21,566,044 732,057 August 14, 2000 40 yrs.
Industrial and manufacturing
facility leased to Gerber
Scientific, Inc. 18,822,872 20,378,272 686,251 July 30, 2001 N/A
Industrial and manufacturing
facility leased to Meridian
Automotive Systems, Inc. 8,970,226 10,340,226 233,519 November 16, 2000 40 yrs.
Industrial and manufacturing
facility leased to
Waddington North
America, Inc. 13,426,582 17,824,582 572,863 April 30, 2001 7 - 40 yrs.
Industrial and manufacturing
facility leased to New
Creative Enterprises, Inc. 12,869,110 14,869,110 415,565 September 6, 2001 40 yrs.
Retail and service facility
leased to Lincoln Technical
Institute, Inc. 7,601,852 10,088,236 198,395 December 28, 2001 40 yrs.
Manufacturing and
distribution facility leased
to Gibson Guitar, Inc. 17,947,518 21,847,518 803,371 March 19, 2001 40 yrs.
-35-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Costs
Initial Cost to Company Capitalized
----------------------- Subsequent to Decrease in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- --------------- ----
Operating Method:
Office and Research facility
leased to Nortel Networks
Limited 29,764,678 3,400,000 45,053,608 3,400,000
Industrial and manufacturing
facility leased to Perkin
Elmer, Inc. - Finland 20,824,948 801,195 23,389,834 81,315 4,469,183 948,908
Retail and service facilities
leased to Petsmart, Inc. 42,790,192 17,100,000 54,742,917 17,100,000
Distribution and warehouse
facility leased to Nexpak
Corporation 7,764,536 2,167,000 11,445,566 5,231 2,167,000
Distribution and warehouse
facility leased to Nexpak
Corporation - Netherlands 5,411,166 2,230,224 3,360,091 1,024,372 2,639,086
Multiplex motion picture
theater leased to Rave
Review Cinemas, LLC 3,200,000 3,066,397 6,314,722 3,200,000
Vacant property located in
Lindon, Utah 1,390,000 1,122,716 5,728,208 1,390,000
Warehouse, distribution,
office, and industrial
facility to PW Eagle, Inc. 8,153,817 6,050,000 8,198,138 6,050,000
Distribution and Warehouse
facility leased to Heafner
Tire Group, Inc. 8,710,817 1,860,000 12,851,675 1,860,000
Warehouse and distribution
facility leased to Carrefour
France, SAS 79,934,867 15,724,087 75,210,660 15,479,583 18,230,816
Warehouse, distribution, and
office facility leased to
Katun Corporation 18,946,614 3,260,000 26,009,123 3,260,000
Industrial facility leased to
Katun Corporation -
Netherlands 5,819,113 2,374,404 3,864,260 371,828 2,515,920
Industrial facility leased to
Tower Automotive, Inc. 19,789,677 4,390,000 30,336,328 4,390,000
------------ ------------ ------------ --------------- --------------- ------------
$597,549,254 $178,113,756 $727,251,058 $87,242,527 $ 17,534,966 $181,833,960
============ ============ ============ =============== =============== ============
Life on which
Gross Amount at which Carried Depreciation in
at Close of Period Latest Statement
------------------ Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Office and Research facility
leased to Nortel Networks
Limited 45,053,608 48,453,608 1,173,271 December 19, 2001 40 yrs.
Industrial and manufacturing
facility leased to Perkin
Elmer, Inc. - Finland 27,792,619 28,741,527 723,467 December 28, 2001 40 yrs.
Retail and service facilities
leased to Petsmart, Inc. 54,742,917 71,842,917 1,540,091 November 28, 2001 40 yrs.
Distribution and warehouse
facility leased to Nexpak
Corporation 11,450,797 13,617,797 512,802 March 28, 2001 40 yrs.
Distribution and warehouse
facility leased to Nexpak
Corporation - Netherlands 3,975,601 6,614,687 155,174 June 29, 2001 40 yrs.
Multiplex motion picture
theater leased to Rave
Review Cinemas, LLC 9,381,119 12,581,119 364,567 December 7, 2000 40 yrs.
Vacant property located in
Lindon, Utah 6,850,924 8,240,924 178,866 December 27, 2000 40 yrs.
Warehouse, distribution,
office, and industrial
facility to PW Eagle, Inc. 8,198,138 14,248,138 179,250 February 28, 2002 40 yrs.
Distribution and Warehouse
facility leased to Heafner
Tire Group, Inc. 12,851,675 14,711,675 255,902 March 26, 2002 40 yrs.
Warehouse and distribution
facility leased to Carrefour
France, SAS 88,183,514 106,414,330 1,647,055 March 26, 2002 40 yrs.
Warehouse, distribution, and
office facility leased to
Katun Corporation 26,009,123 29,269,123 297,999 July 5, 2002 40 yrs.
Industrial facility leased to
Katun Corporation -
Netherlands 4,094,572 6,610,492 46,874 July 5, 2002
Industrial facility leased to
Tower Automotive, Inc. 30,336,328 34,726,328 537,206 August 10, 2002 40 yrs.
------------ --------------- ----------------
$828,308,347 $ 1,010,142,307 $ 38,682,696
============ =============== ================
-36-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Costs Capitalized Increase
Subsequent to (Decrease) in Net
Initial Cost to Company Acquisition Investments (b)
------------------------- ----------- ---------------
Description Encumbrances Land Buildings
----------- ------------ ---- ---------
Direct Financing Method:
Industrial/manufacturing facilities
leased to Atrium Companies, Inc. $12,957,571 $ 459,608 $ 20,426,564 $(3,191,407)
Industrial/manufacturing facilities
leased to Scott Companies, Inc. 2,913,920 2,340,000 3,942,723
Multiplex theater facility leased to
Consolidated Theaters Holding, G.P. 7,067,388 10,818,996 $ 854,117 $ 300,513
Office and research facility leased to
Advance Paradigm, Inc. 15,312,356 25,414,917
Distribution and warehouse facility
leased to Towne Holdings, Inc. 2,384,361 4,172,251 3,920
Manufacturing and distribution
facility leased to BLP Group plc 5,985,214 8,383,364 7,099 1,049,633
Industrial and manufacturing facility
leased to Collins and Aikman
Corporation 16,750,010 2,961,000 24,473,555 20,257
Office facility leased to UTI
Holdings, Inc. and Nascar Technical
Institute 1,600,000 9,275,962 115,053
----------- ---------- ------------ ---------- -----------
$63,370,820 $7,360,608 $106,908,332 $1,000,446 $(1,841,261)
=========== ========== ============ ========== ===========
Gross Amount
at which Carried at
Close of Period
---------------
Description Total Date Acquired
----------- ----- -------------
Direct Financing Method:
Industrial/manufacturing facilities
leased to Atrium Companies, Inc. $ 17,694,765 November 18, 1999
Industrial/manufacturing facilities
leased to Scott Companies, Inc. 6,282,723 July 19, 1999
Multiplex theater facility leased to
Consolidated Theaters Holding, G.P. 11,973,626 September 22, 1999
Office and research facility leased to
Advance Paradigm, Inc. 25,414,917 September 21, 2000
Distribution and warehouse facility
leased to Towne Holdings, Inc. 4,176,171 October 30, 2000
Manufacturing and distribution
facility leased to BLP Group plc 9,440,096 January 9, 2001
Industrial and manufacturing facility
leased to Collins and Aikman
Corporation 27,454,812 September 28, 2001
Office facility leased to UTI
Holdings, Inc. and Nascar Technical
Institute 10,991,015 February 11, 2002
------------
$113,428,125
============
-37-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
and SUBSIDIARIES
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and
acquisition costs including legal fees, appraisal fees, title costs and
other related professional fees.
(b) The increase (decrease) in net investment is due to the amortization of
unearned income producing a constant periodic rate of return on the net
investment which is more (less) than lease payments received, foreign
currency translation adjustments, impairment losses and property sales.
(c) At December 31, 2002, the aggregate cost of real estate owned by
CPA(R):14 and its subsidiaries for Federal income tax purposes
$916,934,104.
(d)
Reconciliation of Real Estate Accounted
for Under the Operating Method
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $ 799,046,644 $ 439,435,091
Impairment losses - (3,810,000)
Additions 189,179,533 366,777,516
Dispositions - (3,558,600)
Reclassification from real estate under construction 571,164 -
Foreign currency translation adjustment 21,344,966 202,637
-------------- -------------
Balance at close of year $1,010,142,307 $ 799,046,644
============== =============
Reconciliation of Accumulated Depreciation
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $17,728,004 $ 5,445,242
Depreciation expense 20,698,586 12,591,767
Dispositions - (308,633)
Foreign currency translation adjustment 256,106 (372)
----------- -----------
Balance at close of year $38,682,696 $17,728,004
=========== ===========
-38-
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
2002 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except per share and share amounts)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATING DATA:
Revenues $ 112,356 $ 67,141 $ 42,540 $ 9,990 $ 2,209
Income from continuing
operations 29,861 18,237 21,438 7,645 1,058
Net income 30,266 18,377 21,577 7,678 1,058
Basic and diluted earnings
from continuing
operations per share .45 .36 .60 .39 .25
Basic and diluted earnings
per share .45 .36 .60 .39 .25
Dividends paid(1) 48,581 32,811 21,466 9,781 1,324
Dividends declared per share .75 .71 .67 .65 .47
Weighted average shares
outstanding - basic 66,193,674 51,422,168 32,721,141 19,909,834 4,273,311
Payment of mortgage
principal(2) 6,543 2,557 628 144 -
BALANCE SHEET DATA:
Total consolidated assets 1,319,897 1,097,238 645,762 331,063 107,956
Long-term obligations(3) 678,401 471,942 224,015 54,350 1,629
(1) The Company paid its first dividend in July 1998.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents mortgage notes payable and deferred acquisition fee
installments that are due after more than one year.
-1-
MANAGEMENT'S DISCUSSION AND ANALYSIS
(dollar amounts in thousands)
Overview
The following discussion and analysis of the financial condition and results of
operations of Corporate Property Associates 14 Incorporated ("CPA(R):14") should
be read in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2002. The following discussion includes
forward looking statements. Forward looking statements, which are based on
certain assumptions, describe CPA(R):14's future plans, strategies and
expectations. Such statements involve known and unknown risks, uncertainties and
other factors that may cause CPA(R):14's actual results, performance or
achievement to be materially different from the results of operations or plan
expressed or implied by these forward looking statements. Accordingly, this
information should not be regarded as representations that the results or
condition described in these statements or objectives and plans will be
achieved.
CPA(R):14 was formed in 1997 for the purpose of engaging in the business of
investing in and owning commercial and industrial real estate. Between November
1997 and November 2001, CPA(R):14 issued 65,794,281 shares of common stock at
$10 per share on a "best efforts" basis, raising $657,943. CPA(R):14 is using
the proceeds from the public offerings along with limited recourse mortgage
financing to purchase properties and enter into long-term net leases with
corporate tenants. Substantially all of CPA(R):14's net leases have been
structured to place certain economic burdens of ownership on these corporate
tenants by requiring them to pay the costs of maintenance and repair, insurance
and real estate taxes. The lease obligations are unconditional. When possible,
CPA(R):14 also negotiates guarantees of the obligations from the parent company
of the lessees. The leases have generally been structured to include periodic
rent increases that are stated or based on increases in the Consumer Price Index
("CPI") or, for certain retail properties, may provide for additional rents
based on sales in excess of a specified base amount. In addition to investing
directly, CPA(R):14 may also acquire interests in real estate through joint
ventures. These joint ventures are generally with affiliates.
As a real estate investment trust ("REIT"), CPA(R):14 is not subject to federal
income taxes on amounts distributed to shareholders provided it meets certain
conditions including distributing at least 90% of its REIT taxable income to its
shareholders. The primary objectives of CPA(R):14 are to provide rising cash
flow and pay quarterly dividends at an increasing rate and to protect its
investors from the effects of inflation through rent escalation provisions,
property appreciation, tenant credit improvement and regular paydown of limited
recourse mortgage debt. In addition, CPA(R):14 has successfully negotiated
grants of common stock warrants from selected tenants and expects to realize the
benefits of appreciation from those grants. CPA(R):14 cannot guarantee that its
objectives will be ultimately realized.
CPA(R):14 is advised by Carey Asset Management Corp., a wholly-owned subsidiary
of W. P. Carey & Co. LLC, an affiliate, pursuant to an Advisory Agreement.
CPA(R):14's Advisory Agreement is renewable annually by Independent Directors
who are elected by CPA(R):14's shareholders. In connection with each renewal,
Carey Asset Management is required to provide the Independent Directors with a
comparison of the fee structure with several similar companies. The Advisory
Agreement also provides, commencing in 2003, that an independent portfolio
valuation be performed annually and Average Invested Assets, the basis for
determining asset management and performance fees, are based on the results of
this independent valuation. Until the initial valuation is performed, the fees
are calculated based on the historical cost of the purchased real estate assets.
Critical Accounting Policies
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
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
evaluate specific situations rather than solely use statistical methods.
CPA(R):14 recognized a provision for uncollected rents which typically ranges
between 0.25% and 1% of lease revenues (rental income and interest income from
direct financing leases) and will measure its allowance against actual rent
arrearages and adjust the percentage applied. Based on its actual experience,
CPA(R):14 incurred a charge of approximately 0.25% of lease revenues and
believes that its current allowance is adequate.
Real estate accounted for under the operating method is stated at cost less
accumulated depreciation. Costs directly related to build-to-suit projects,
primarily interest, if applicable, are capitalized. Interest capitalized in
2002, 2001 and 2000 was $808, $1,986 and $1,910, respectively. CPA(R):14
considers a build-to-suit project as substantially completed upon completion of
improvements, but no later than a date that is negotiated and stated in the
lease. If portions of a project are substantially completed and occupied and
other portions have not reached that stage, the substantially completed portions
are accounted for separately. CPA(R):14 allocates costs incurred between the
portions under construction and the portions completed and only capitalizes
costs for the portion under construction.
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 and residual values. As CPA(R):14's
investment objective is to hold properties on a long-term basis, holding periods
will range from five to ten years. In its evaluations, CPA(R):14 obtains market
information from outside sources; however, such information requires Management
to determine whether the information received is appropriate to the
circumstances. Depending on the assumptions made and estimates used, the
estimated cash flow projected in the evaluation of long-lived assets can vary
within a range of outcomes. CPA(R):14 considers the likelihood of possible
outcomes in determining the best 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 performs a review of its
estimated residual value of properties at least annually to determine whether
there has been an other than temporary decline in CPA(R):14's current estimate
of residual value of the underlying real estate assets. If the review indicates
a decline in residual values that is other than temporary, a loss is recognized
and the accounting for the direct financing lease will be revised using the
changed estimate, that is, a portion of the future cash flow from the lessee
will be recognized as a return of principal rather than as revenue.
When assets are identified by Management as held for sale, CPA(R):14
discontinues depreciating the assets and estimates the sales price, net of
selling costs, of such assets. If, in Management's opinion , the net sales price
of the assets which have been identified for sale is less than the net book
value of the assets, an impairment charge is recognized and a valuation
allowance is established. If circumstances that previously were considered
unlikely occur and, as a result, CPA(R):14 decides not to sell a property
previously classified as held for sale, the property is reclassified as held and
used. A property that is reclassified is measured and recorded individually at
the lower of (a) the carrying value before it was classified as held for sale,
adjusted for any depreciation expense that would have been recognized had the
property been continuously classified as held and used, or (b) the fair value at
the time of the subsequent decision not to sell.
In 2002, CPA(R):14 acquired a subordinated interest in a mortgage trust that
consists of limited recourse loans on 62 properties that are owned by CPA(R):14
or three of its affiliates. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. If there are adverse changes
in either market rates or the credit quality of the lessees, the model and,
therefore, the income recognized from the subordinated interests as well as the
fair value, will be adjusted.
Costs incurred in connection with leases are capitalized and amortized on a
straight-line basis over the terms of the related leases and included in
property expense. Unamortized leasing costs are also charged to property expense
upon early termination of the lease. Costs incurred in connection with obtaining
mortgages and debt financing are capitalized and amortized over the term of the
related debt and included in interest expense. Unamortized financing costs are
included in charges for early extinguishment of debt if a loan is retired early
and the costs have not been
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
fully amortized.
Stated rental revenue and interest income from direct financing leases are
recognized on a straight-line basis and a constant rate of interest,
respectively, over the terms of the respective leases. Unbilled rents receivable
represents the amount by which straight-line rental revenue exceeds rents
currently billed in accordance with the lease agreements. The majority of
CPA(R):14's leases provide for periodic rent increases based on formulas indexed
to increases in the CPI. CPI-based and other contingent-type rents are
recognized currently. 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 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. 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 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. All of the jointly-held investments are subject to
contractual agreements. No fees are payable to affiliates under any of the
limited partnership and joint venture agreements. The presentation of these
jointly held investments and their related results in the accompanying
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):14 or accounted for under
the equity method. Equity method investments are reviewed for impairment in the
event of a change in circumstances that is other than temporary. An investment's
value is only impaired if Management's estimate of the net realizable value of
the investment is less than the carrying value of the investment. To the extent
an impairment has occurred, the loss shall be measured as the excess of the
carrying amount of the investment over the fair value of the investment.
CPA(R):14 measures derivative instruments, including derivative instruments
embedded in other contracts, if any, at fair value and records them as an asset
or liability, depending on CPA(R):14's rights or obligations under the
applicable derivative contract. For derivatives designated as fair value hedges,
the changes in the fair value of both the derivative instrument and the hedged
item are recorded in earnings. For derivatives designated as cash flow hedges,
the effective portions of the derivative are reported in other comprehensive
income, a component of shareholders' equity, and are subsequently reclassified
into earnings when the hedged item affects earnings (i.e., the forecasted event
occurs). Changes in fair value of derivative instruments not designated as
hedging and ineffective portions of hedges are recognized in the determination
of earnings.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. Operating segments are
components of an enterprise about which financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management evaluates the
performance of CPA(R):14's portfolio of properties as a whole, rather than by
identifying discrete operating segments. This evaluation includes assessing
CPA(R):14's ability to meet distribution objectives, increase the dividend and
increase value by evaluating potential investments in single tenant net lease
real estate and by seeking favorable limited recourse mortgage financing
opportunities. As of December 31, 2002, CPA(R):14 operates in one segment, real
estate operations, and owned properties in the United States, the Netherlands,
Finland, France and the United Kingdom.
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net income for the year ended December 31, 2002 is not directly comparable to
net income for the year ended December 31, 2001 as a result of substantial
increase in CPA(R):14's asset base. Net income was $30,266 in 2002 as compared
to $18,377 in 2001. Since December 31, 2001, CPA(R):14's asset base has
increased by more than
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
$217,371, or 20%, and by more than 100% since December 31, 2000. The asset base
is projected to continue to increase until available cash is fully invested in
real estate.
Income from continuing operations before gains and losses increased by $11,001
for the year ended December 31, 2002 as compared with the year ended December
31, 2001. The increase was due to an increase in lease revenues and an increase
in income from equity investments, which was offset, in part, by increases in
interest expense, depreciation, property and general and administrative
expenses. As a result of the on-going acquisition activity, CPA(R):14's revenue
and expense are projected to increase.
Lease revenues increased primarily as result of real estate purchases and the
completion of built-to-suit projects during 2001 and 2002. During 2002,
CPA(R):14 purchased properties and 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 will provide annual revenues of $22,728
($11,594 of cash flow after debt service). These new leases contributed $14,186
of lease revenues in 2002. CPA(R):14 completed new acquisitions with thirteen
leases in 2001 and the current year reflected the first full year of results
from those lessees. Lease revenues also benefited from scheduled rent increases
on existing leases. Lease revenues for the year ended December 2002 reflect a
reduction of $605 as a result of the lease termination of the Burlington Motor
Carriers, Inc. lease in March 2002 pursuant to its reorganization in bankruptcy.
Annual revenues from the Burlington lease were $833. Most of CPA(R):14's leases
provide for rent increases, either based on fixed amounts or a formula indexed
to increases in CPI. Over the past several years, the CPI has increased within a
range of approximately 1.5% to 3% per year. More than 45 leases have rent
increases scheduled in 2003 and 2004 and no leases are scheduled to expire until
2005.
Income from equity and investments ("equity income") increased primarily due to
the acquisition of properties leased to Special Devices, Inc. and Clear Channel
Communication, Inc. in June 2001 and December 2002, respectively. In addition,
equity income benefited from rent increases on three existing leases. Of the
$1,627 increase in equity income from the prior year, $387 was due to the
acquisition of the interests in the Special Devices and Clear Channel properties
and $407 was due to rent increases. An equity investment in properties leased to
CheckFree Corporation has a mortgage obligation with a variable rate indexed to
the London Inter-Bank Offered Rate. The LIBOR index declined in 2002 and 2001,
and CPA(R):14's share of income from the CheckFree investment increased by
approximately $265 from 2001, solely as a result of this rate reduction. Equity
income is projected to increase due to the acquisition in December 2002 of 35%
and 40% interests in limited partnerships that lease properties to TruServ
Corporation and Clear Channel, respectively. In February 2003, CPA(R):14 also
acquired a 41% interest in a limited liability company which leases properties
to Starmark Camhood, LLC. The Starmark limited liability company acquired 15
properties for $178,010 and obtained $108,300 of limited recourse mortgage
financing.
Interest expense for the year ended December 31, 2002 increased by $23,168,
primarily from obtaining new mortgage loans. In connection with its
participation in a mortgage securitization transaction, CPA(R):14 obtained
$42,332 of limited recourse mortgage financing on previously unencumbered
properties. As a result of this transaction, annual interest expense will
increase by $3,175. The increase in depreciation expense is the result of the
increase in real estate assets. Depreciation, a noncash charge, increased by $
8,107.
The increase in general and administrative expense of $2,130 was primarily due
to an increase in investor-related costs and other costs related to the increase
in CPA(R):14's asset base. Property expense increased primarily due to increases
in asset management and performance fees which are calculated based on the
Average Invested Assets (i.e. real estate assets) of CPA(R):14. Effective
January 1, 2003, asset management and performance fees will be determined based
on an independent valuation of CPA(R):14's real estate assets which will be
performed annually. Asset-based fees may be expected to increase as a result of
appreciation in the value of CPA(R):14's real estate assets and the acquisition
of properties. Property expense also increased to reflect the costs of the
initial valuation of CPA(R):14's real estate assets.
As of December 31, 2002, CPA(R):14 recognized an unrealized gain of $385 on its
holdings of warrants for common stocks and unrealized foreign currency loss of
$30. In evaluating its ability to fund dividends, CPA(R):14 does not
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
consider unrealized gains and losses from these derivative instruments.
Discontinued operations include a gain on sale of real estate property in
Greenville, Texas of $333, which was sold in June 2002, and $72 from the
operations of the Greenville property for the period prior to the sale.
Because of the long-term nature of CPA(R):14's net leases, inflation and
changing prices have not unfavorably affected CPA(R):14's revenues and net
income. CPA(R):14's net leases generally have rent increases based on formulas
indexed to increases in the CPI, sales overrides or other periodic increases
which are designed to increase lease revenues in the future.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net income for the year ended December 31, 2001 is not directly comparable to
net income for the year ended December 31, 2000. CPA(R):14's total assets have
increased by approximately 70% since December 31, 2000. During 2001, CPA(R):14
acquired 52 new properties and obtained $262,136 of new limited recourse
mortgage financing and raised more than $203,000, net of costs, in connection
with its public offering. Accordingly, the results of operations for the years
ended December 31, 2001 and 2000 are not fully comparable. Net income for 2001
decreased by $3,200 to $18,377 in 2002 from $21,577 in 2000 because the results
for 2000 include a nonrecurring item included in other income which contributed
approximately $6,017 to earnings. Results for both 2000 and 2001 include noncash
impairment charges of $2,462 and $3,810, respectively. Excluding the effect of
these two items, income would have reflected an increase of $4,165. The increase
in earnings, as adjusted for nonrecurring items and the impairment charge, was
due to the increase in CPA(R):14's asset base. CPA(R):14 expects its real estate
assets to continue to increase as it still has substantial cash available for
additional investment.
Lease revenues have increased $37,733 due to the acquisition of properties.
Properties acquired and build-to-suit projects completed in 2000 and 2001 are
leased to 40 lessees. As of December 31, 1999, CPA(R):14 had eleven lessees. In
2001, CPA(R):14 recorded an impairment loss of $3,810 on a property leased to
Burlington.
Interest expense increased due to a full year's effect of $166,222 of limited
recourse mortgage debt obtained in 2000 and $264,211 obtained in 2001. Property
expense reflects increases in asset management and performance fees which are
calculated based on the Average Invested Assets. The increase in depreciation
expense of $8,299 is the result solely of the increase in real estate assets.
Earnings for 2000 include (nonrecurring) other income of $10,029 relating to the
settlement proceeds from the Ameriserve Food Distribution Inc. bankruptcy. Of
this settlement, 40% ($4,012) is allocable to the minority interest owner of the
subsidiaries, an affiliate, which owns the affected properties.
Financial Condition
CPA(R):14's cash and cash equivalents at December 31, 2002 decreased by $73,588
to $74,107 as cash was used to acquire properties. 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 year ended December 31, 2002, cash flows from continuing operations and
equity investments of $61,951 were sufficient to pay dividends to shareholders
of $48,581, meet scheduled principal payment installments on mortgage debt of
$6,543 and distribute $3,105 to minority interests. Operating cash flow is
expected to continue to increase as a result of the new leases that have been
entered into since December 31, 2001. These new leases have not yet provided a
full year of cash flow, and the cash flow is expected to allow CPA(R):14 to meet
its objective of paying quarterly dividends at an increasing rate. CPA(R):14
invests its available cash in conservative, low-yielding money market
instruments until suitable real estate investments have been selected.
CPA(R):14's investing activities for 2002 included investing $269,117 in real
estate acquisitions, acquiring interests in properties through equity interests
in limited partnerships and limited liability companies with affiliates, and
funding construction on build-to-suit commitments. Acquisitions in 2002 include
properties leased to UTI Holdings, Inc. PW Eagle, American Tire Distributors,
Carrefour France, Tower Automotive, and Katun. CPA(R):14 also acquired
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
land and entered into a build-to-suit commitment with Career Education Corp. and
ownership interests were acquired in limited partnerships which lease properties
to TruServ, and Clear Channel. In February 2003, CPA(R):14 acquired a 41%
interest in properties leased to Starmark. CPA(R):14's share of annual cash flow
from the properties acquired in 2002 and the Starmark properties is projected to
be $14,947. In addition, in 2002 CPA(R):14 used $6,032 to acquire an interest in
a mortgage trust and $1,638 to pay its Advisor its annual installment of
deferred acquisition fees. CPA(R):14 sold a property for $3,634. CPA(R):14's
remaining funding commitment for the Career Education build-to-suit scheduled to
be completed by July 1, 2003 is $6,386. CPA(R):14 has funding commitments of
$2,443 on other properties.
CPA(R):14 participated in a mortgage pool consisting 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 December 31, 2002, CPA(R):14 owned approximately $6,032,
25% of the subordinated interests. 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 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. The mortgage pool allowed CPA(R):14 and its affiliates to use a
non-traditional source of mortgage financing with favorable terms, including a
7.5% annual interest rate 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 may seek to obtain
additional limited recourse mortgages through a mortgage securitization in the
future, although there are no current plans for an additional securitization
transaction. All of the loans from the securitization are limited recourse loans
and have maturity dates between March 2010 and September 2012 at which time
balloon payments are scheduled. CPA(R):14 has no mortgage balloon payments
scheduled until June 2006.
In addition to paying dividends to shareholders, paying scheduled mortgage
principal payments and making distributions to minority partners, CPA(R):14's
financing activities for 2002 include receiving $196,596 of mortgage proceeds,
paying off a mortgage loan of $3,800, using $4,050 to pay deferred financing
costs and mortgage deposits and funding $2,537 into a defeasance escrow account.
The defeasance escrow account was funded from proceeds of the sale. The
Greenville property mortgage note payable did not allow for a prepayment. In
order to meet the debt service requirements under the mortgage loan, including a
balloon payment of $1,852 in January 2010, the defeasance account was funded
with fixed rate instruments with maturity dates and amounts scheduled to meet
the debt service requirements of the mortgage loan.
In the first quarter of 2002, CPA(R):14 received $10,766 from its minority
partner and affiliate, Corporate Property Associates 15 Incorporated
("CPA(R):15"), when CPA(R):15 exercised its purchase option to increase its
ownership interests in the Petsmart, Inc. and Builders Firstsource, Inc. limited
partnerships to 30% and 40%, interests, respectively. CPA(R):14 owns the
remaining 70% and 60% interests.
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.
CPA(R):14 uses limited recourse mortgage debt because a lender on limited
recourse mortgage debt has recourse only to the property (and lease assignments)
collateralizing such debt and not to any of CPA(R):14's other assets, while
unsecured financing would allow a lender recourse to all of CPA(R): 14's assets.
The use of limited recourse debt, therefore, will allow CPA(R):14 to limit the
exposure of its assets to any one debt obligation. Management believes that the
strategy of combining equity and limited recourse mortgage debt will allow
CPA(R):14 to meet its short-term and long-term liquidity needs and will help to
diversify CPA(R):14's portfolio and, therefore, reduce concentration of risk in
any particular lessee, industry type and property type. The loans, most of which
provide for fixed rates of interest, generally have a term of at least ten
years. After CPA(R):14 fully invests the proceeds of its offerings 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. As of
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
March 14, 2003, CPA(R):14 had approximately $40,998 available for additional
acquisitions and completion of build-to-suit construction commitments.
Off-Balance Sheet and Aggregate Contractual Agreements
A summary of CPA(R):14's contractual obligations and commitments is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Mortgage notes payable $666,740 $ 9,136 $ 9,847 $10,784 $11,663 $12,540 $612,770
Deferred acquisition fees 23,170 2,373 3,204 3,204 3,204 3,204 7,981
Subordinated disposition fees 240 240
Commitments:
Commitments for build-to-suit
construction 8,829 8,829
Share of minimum rents payable
under office cost-sharing
agreement 1,462 390 390 390 292 - -
-------- ------- ------- ------- ------- ------- --------
$700,441 $20,728 $13,441 $14,378 $15,159 $15,744 $620,991
======== ======= ======= ======= ======= ======= ========
In connection with the purchase of its properties, CPA(R):14 requires the
sellers to perform environmental reviews. Management believes, based on the
results of such reviews, that CPA(R):14's properties were in substantial
compliance with Federal and state environmental statutes at the time the
properties were acquired. However, portions of certain properties have been
subject to some degree of contamination, principally in connection with either
leakage from underground storage tanks, surface spills from facility activities
or historical on-site activities. In most instances where contamination has been
identified, tenants are actively engaged in the remediation process and
addressing identified conditions. Tenants are generally subject to environmental
statutes and regulations regarding the discharge of hazardous materials and any
related remediation obligations. In addition, CPA(R):14's leases generally
require tenants to indemnify CPA(R):14 from all liabilities and losses related
to the leased properties with provisions of such indemnification specifically
addressing environmental matters. The leases generally include provisions which
allow for periodic environmental assessments, paid for by the tenant, and allow
CPA(R):14 to extend leases until such time as a tenant has satisfied its
environmental obligations. Certain of the leases allow CPA(R):14 to require
financial assurances from tenants such as performance bonds or letters of credit
if the costs of remediating environmental conditions are, in the estimation of
CPA(R), in excess of specified amounts. Accordingly, Management believes that
the ultimate resolution of any environmental matter will not have a material
adverse effect on CPA(R):14's financial condition, liquidity or results of
operations.
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
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
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
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 June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. CPA(R):14 does not expect SFAS No. 143 to have a material effect on
its 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. CPA(R):14 does not have any employees nor any stock-based
compensation plans.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require
CPA(R):14 to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
accounting provisions only apply for certain new transactions entered into or
existing guarantee contracts modified after December 31, 2002. The adoption of
the accounting provisions of FIN 45 is not expected to have a material effect on
CPA(R):14's financial statements.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. The transitional disclosures
requirements will take effect almost immediately and are required for all
financial statements initially issued after January 31, 2003. CPA(R):14 is
assessing the impact of this interpretation on its accounting for its
investments in unconsolidated joint ventures and does not expect FIN 46 to have
a material effect on its financial statements. CPA(R):14's maximum loss exposure
is the carrying value of its equity investments.
-10-
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Corporate Property Associates 14 Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Corporate Property
Associates 14 Incorporated and its subsidiaries at December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of Carey Asset Management Corp. (the
"Advisor"); our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the Advisor, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2003
-11-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
December 31,
------------
2002 2001
---- ----
ASSETS:
Real estate leased to others:
Accounted for under the operating method
Land $ 181,834 $ 144,955
Buildings 828,308 654,092
----------- -----------
1,010,142 799,047
Less, accumulated depreciation 38,683 17,728
----------- -----------
971,459 781,319
Net investment in direct financing leases 113,428 104,321
Real estate under construction 14,723 -
Equity investments 99,320 41,690
Cash and cash equivalents 74,107 147,695
Marketable securities 6,258 -
Other assets, net of accumulated amortization of $1,252 and $418 in 2002 and 2001 and allowance
for uncollected rents of $574 and $1,302 in 2002 and 2001 40,602 22,213
----------- -----------
Total assets $ 1,319,897 $ 1,097,238
=========== ===========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 666,740 $ 463,864
Accrued interest 4,043 2,426
Due to affiliates 3,821 3,651
Accounts payable and accrued expenses 7,898 2,207
Prepaid rental income and security deposits 20,642 12,810
Deferred acquisition fees payable to affiliate 23,170 18,661
Dividends payable 12,488 11,318
----------- -----------
Total liabilities 738,802 514,937
----------- -----------
Minority interest 29,206 19,822
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000 shares; issued and outstanding,
66,836,152 and 66,315,466 shares at December 31, 2002 and 2001 67 66
Additional paid-in capital 597,852 593,487
Dividends in excess of accumulated earnings (47,508) (28,023)
Accumulated other comprehensive income 6,113 (101)
----------- -----------
556,524 565,429
Less, treasury stock at cost, 520,911 and 329,976 shares at December 31, 2002 and 2001 (4,635) (2,950)
----------- -----------
Total shareholders' equity 551,889 562,479
----------- -----------
Total liabilities, minority interest and shareholders' equity $ 1,319,897 $ 1,097,238
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-12-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS of INCOME
(In thousands except share and per share amounts)
For the years ended December 31,
--------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues:
Rental income $ 98,112 $ 55,490 $ 22,879
Interest income from direct financing leases 11,798 8,899 3,777
Interest and other income 2,446 2,752 15,884
------------ ------------ ------------
112,356 67,141 42,540
------------ ------------ ------------
Expenses:
Interest 45,249 22,081 6,638
Depreciation 20,699 12,592 4,293
General and administrative 6,438 4,308 2,585
Property expense 14,060 9,247 3,993
Impairment charges on real estate - 3,810 2,462
------------ ------------ ------------
86,446 52,038 19,971
------------ ------------ ------------
Income from continuing operations before minority interest,
income from equity investments and gain (loss) 25,910 15,103 22,569
Minority interest in income (1,724) (291) (4,075)
------------ ------------ ------------
Income from continuing operations before income from equity
investments and (loss) gain 24,186 14,812 18,494
Income from equity investments 5,320 3,693 3,248
------------ ------------ ------------
Income from continuing operations before (loss) gain 29,506 18,505 21,742
Loss on sale of real estate - (346) (304)
Unrealized gain on warrants and foreign currency contract, net 355 78 -
------------ ------------ ------------
Income from continuing operations 29,861 18,237 21,438
Discontinued operations:
Income from operation of discontinued properties 72 140 139
Gain on sale of real estate 333 - -
------------ ------------ ------------
Income from discontinued operations 405 140 139
------------ ------------ ------------
Net income $ 30,266 $ 18,377 $ 21,577
============ ============ ============
Basic and diluted earnings per share:
Income from continuing operations $ .45 $ .36 $ .60
Discontinued operations - - -
------------ ------------ ------------
Net income $ .45 $ .36 $ .60
============ ============ ============
Weighted average shares outstanding - basic and diluted 66,193,674 51,422,168 35,721,141
============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
-13-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENT of SHAREHOLDER'S EQUITY
(In thousands except share amounts)
For the years ended December 31, 2000, 2001, and 2002
Dividends in
Excess of
Common Additional Comprehensive Accumulated
Stock Paid-in Capital Income Earnings
--------- --------------- ------------- ------------
Balance at December 31, 1999 $ 29 $ 265,487 $ (6,896)
13,620,950 shares issued $.001 par, at $10 per
share, net of offering costs 14 120,854
Dividends declared (23,866)
Purchase of treasury stock, 66,848 shares
Net income 21,577
--------- -------------- ------------
Balance at December 31, 2000 43 386,341 (9,185)
23,233,922 shares issued $.001 par, at $10 per
share, net of offering costs 23 207,146
Dividends declared (37,215)
Purchase of treasury stock, 183,289 shares
Comprehensive income:
Net income $ 18,377 18,377
Other comprehensive income:
Foreign currency translation (101)
adjustment -------------
$ 18,276
--------- -------------- ============= ------------
Balance at December 31, 2001 66 593,487 (28,023)
520,686 shares issued $.001 par, at $10 per
share, net of offering costs 1 4,365
Dividends declared (49,751)
Purchase of treasury stock, 190,935 shares
Comprehensive income:
Net income 30,266 30,266
-------------
Other comprehensive income:
Unrealized appreciation on marketable
securities 257
Foreign currency translation adjustment 5,957
-------------
6,214
-------------
$ 36,480
--------- -------------- ============= ------------
Balance at December 31, 2002 $ 67 $ 597,852 $ (47,508)
========= ============== ============
Accumulated Other
Comprehensive Treasury
Income Stock Total
----------------- ------------ -----------
Balance at December 31, 1999 $ (742) $ 257,878
13,620,950 shares issued $.001 par, at $10 per
share, net of offering costs 120,868
Dividends declared (23,866)
Purchase of treasury stock, 66,848 shares (596) (596)
Net income 21,577
------------ -----------
Balance at December 31, 2000 (1,338) 375,861
23,233,922 shares issued $.001 par, at $10 per
share, net of offering costs 207,169
Dividends declared (37,215)
Purchase of treasury stock, 183,289 shares (1,612) (1,612)
Comprehensive income:
Net income 18,377
Other comprehensive income:
Foreign currency translation
adjustment $ (101) (101)
----------------- ------------ -----------
Balance at December 31, 2001 (101) (2,950) 562,479
520,686 shares issued $.001 par, at $10 per
share, net of offering costs 4,366
Dividends declared (49,751)
Purchase of treasury stock, 190,935 shares (1,685) (1,685)
Comprehensive income:
Net income 30,266
Other comprehensive income:
Unrealized appreciation on marketable
securities
Foreign currency translation adjustment
6,214 6,214
----------------- ------------ -----------
Balance at December 31, 2002 $ 6,113 $ (4,635) $ 551,889
================= ============ ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-14-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
For the year ended December 31,
-------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income $ 30,266 $ 18,377 $ 21,577
Adjustments to reconcile net income to net cash provided by continuing operations:
Income from discontinued operations, including gain on sale of real estate (405) (140) (139)
Depreciation and amortization of financing costs 21,548 12,951 4,357
Straight-line rent adjustments (4,201) (3,192) (307)
Income from equity investments in excess of distributions received (30) (58) (191)
Minority interest in income 1,724 291 4,075
Loss on sale of real estate - 346 304
Issuance of shares in satisfaction of current and accrued performance fees 5,092 5,012 -
Provision for uncollected rent 275 1,100 202
Impairment charge on real estate - 3,810 2,462
Funds released from (deposited in) escrow - 6,144 (8,950)
Increase in prepaid rents and security deposits 2,545 8,435 3,042
Unrealized net gain on warrants and foreign currency, net (355) (78) -
Change in other operating assets and liabilities, net (a) 4,036 133 2,115
--------- --------- ---------
Net cash provided by continuing operations 60,495 53,131 28,547
Net cash provided by discontinued operations 74 144 142
--------- --------- ---------
Net cash provided by operating activities 60,569 53,275 28,689
--------- --------- ---------
Cash flows from investing activities:
Equity distributions received in excess of equity income 1,456 1,738 1,198
Purchases of real estate and equity investments and other
capitalized costs, net (b) (269,117) (372,835) (344,297)
VAT taxes recoverable on purchase of real estate 1,448 - -
Purchase of securities (8,396) - -
Proceeds from sale of securities 2,364 - -
Funds deposited in construction escrow - (8,000) -
Funds released from escrow for construction - 8,000 -
Proceeds from sale of real estate 3,634 2,903 1,104
Payment of deferred acquisition fees (1,638) (722) (269)
Funds released from escrow - - 10,489
Capital distributions received from equity investments - 22,664 -
--------- --------- ---------
Net cash used in investing activities (270,249) (346,252) (331,775)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from stock issuance, net of costs (1,725) 203,155 120,868
Prepayment of mortgage principal (3,800) (15,529) -
Proceeds from mortgages 196,596 262,136 142,724
Contributions received from minority partner, net of capital distributions 10,766 1,212 9,163
Payments of mortgage principal (6,543) (2,557) (628)
Funding of defeasance escrow account (2,537) - -
Deferred financing costs and mortgage deposits (4,050) (6,546) (2,044)
Dividends paid (48,581) (32,811) (21,466)
Purchase of treasury stock (1,685) (1,612) (596)
Distributions paid to minority interest partner (3,105) (2,323) (808)
--------- --------- ---------
Net cash provided by financing activities 135,336 405,125 247,213
--------- --------- ---------
- Continued -
-15-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
--------- --------- ---------
Effect of exchange rates on cash 756 - -
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (73,588) 112,148 (55,873)
Cash and cash equivalents, beginning of year 147,695 35,547 91,420
--------- --------- ---------
Cash and cash equivalents, end of year $ 74,107 $ 147,695 $ 35,547
========= ========= =========
Noncash operating, investing and financing activities:
In connection with the acquisition of properties during the year ended
December 31, 2001, the Company assumed mortgage payable obligations of
$2,076.
During 2002, a security deposit of $5,287,500 was assigned to a lender.
(a) Excludes changes in accounts payable and accrued expenses and
accounts payable to affiliates balances that relate to the
raising of capital (financing activities) rather than the
Company's real estate operations.
(b) Included in the cost basis of real estate investments acquired
in 2002, 2001, and 2000 are deferred acquisition fees payable
of $6,146, $6,554 and $7,193, respectively.
The accompanying notes are an integral part of the consolidated
financial statements.
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of
Corporate Property Associates 14 Incorporated, its
wholly-owned subsidiaries and controlling majority-owned
interests in limited liability companies and partnerships
(collectively, the "Company"). All material inter-entity
transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The most significant estimates will relate to the
assessment of recoverability of real estate assets and
investments. Actual results could differ from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby
the tenant is generally responsible for all operating expenses
relating to the property, including property taxes, insurance,
maintenance, repairs, renewals and improvements. For the years
ended December 31, 2002, lessees were responsible for the
direct payment of real estate taxes of approximately $11,448.
Expenditures for maintenance and repairs including routine
betterments are charged to operations as incurred, significant
renovations which increase the useful life of the properties
are capitalized.
The Company diversifies its real estate investments among
various corporate tenants engaged in different industries and
by property type.
The leases are accounted for under either the operating or
direct financing method. Such methods are described below:
Operating method - Real estate is recorded at cost
less accumulated depreciation, revenue is recognized
on a straight-line basis over the terms of the lease
and expenses (including depreciation) are charged to
operations as incurred.
Direct financing method - Leases accounted for under
the direct financing method are recorded at their net
investment (Note 6). Unearned income is deferred and
amortized to income over the lease terms so as to
produce a constant periodic rate of return on the
Company's net investment in the lease.
When events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable,
the Company assesses the recoverability of its long-lived
assets, including residual interests of real estate assets and
investments, based on projections of undiscounted cash flows,
without interest charges, over the life of such assets. In the
event that such cash flows are insufficient, the assets are
adjusted to their estimated fair value. Residual values of
direct financing leases are reviewed at least annually. If a
decline in the estimated residual value is other than
temporary, the accounting for the direct financing lease will
be revised using the changed estimate. The resulting reduction
in the net investment in the direct financing lease is
recognized as a loss in the period in which the estimate is
changed.
Substantially all of the Company's leases provide for either
scheduled rent increases, periodic rent increases based on
formulas indexed to increases in the Consumer Price Index
("CPI") or sales overrides. Rents from sales overrides
(percentage rent) are recognized as reported by lessees, that
is, after the level of sales requiring a rental payment to the
Company is reached.
-17-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
For properties under construction, operating expenses
including interest charges are capitalized rather than
expensed and rentals received are recorded as a reduction of
capitalized project (i.e., construction) costs.
Depreciation:
Depreciation is computed using the straight-line method over
the estimated useful lives of the properties - generally 40
years.
Equity Investments:
The Company's interests in entities in which its ownership
interests are 50% or less, and has the ability to exercise
significant influence are accounted for under the equity
method, i.e. at cost, increased or decreased by the Company's
share of earnings or losses, less distributions.
Cash Equivalents:
The Company considers all short-term, highly liquid
investments that are both readily convertible to cash and have
a maturity of generally three months or less at the time of
purchase to be cash equivalents. Items classified as cash
equivalents include commercial paper and money market funds.
Substantially all of the Company's cash and cash equivalents
at December 31, 2002 and 2001 were held in the custody of two
financial institutions, and which balances at times exceed
federally insurable limits. The Company mitigates this risk by
depositing funds with major financial institutions.
Foreign Currency Translation:
The Company consolidates its real estate investments in the
Netherlands, Finland, France and the United Kingdom. The
functional currencies for these investments are the Euro and
British pound. The translation from these local currencies to
the U.S. dollar is performed for assets and liabilities using
current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average
exchange rate during the period. The gains and losses
resulting from such translation are reported as a component of
other comprehensive income as part of shareholders' equity.
Marketable Securities:
Marketable securities are classified as available for sale
securities and reported at fair value with the Company's
interest in unrealized gains and losses on these securities
reported as a component of other comprehensive income (loss)
until realized. Such marketable securities had a cost basis of
$6,001 and reflected a fair value of $6,258 at December 31,
2002. The Company held no marketable securities at December
31, 2001.
Other Assets:
Included in other assets are deferred rental income and
deferred charges. Deferred rental income is the aggregate
difference for operating method leases between scheduled rents
which vary during the lease term and rent recognized on a
straight-line basis. Deferred charges are costs incurred in
connection with mortgage financing, and structuring leases.
Such financing and lease costs are amortized over the terms of
the mortgages and leases and included in interest expense and
property expense, respectively.
Derivative Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities"
established accounting and reporting standards for derivative
instruments. Stock warrants granted to the Company by lessees
in connection with structuring the initial lease transactions
are defined as derivative instruments if such stock warrants
are readily convertible to cash or provide for net settlement
upon conversion. Pursuant to SFAS No. 133, changes in the fair
value of such derivative instruments as determined using an
option pricing model are recognized currently in earnings as
gains or losses. As of December 31, 2002, the Company
recognized an unrealized gain of $385 on warrants issued to
the Company by PW Eagle, Inc., American Tire Distributors,
Inc. and Consolidated Theaters Holding, G.P.
-18-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
A lease for a property located in the Netherlands provides the
Company with an option to receive a portion of rental payments
in Euros or U.S. dollars. Pursuant to the adoption of SFAS No.
133, the option is a derivative instrument and changes in the
fair value of the option are recognized in earnings as gains
or losses. As of December 31, 2002, the Company recognized a
cumulative unrealized foreign currency gain of $48.
Costs of Raising Capital:
Costs incurred in connection with the raising of capital
through the sale of common stock are charged to shareholders'
equity upon the issuance of shares.
Treasury Stock:
Treasury stock is recorded at cost.
Deferred Acquisition Fees:
Fees are payable for services provided by Carey Asset
Management Corp. (the "Advisor"), a wholly-owned subsidiary of
W. P. Carey & Co. LLC, an affiliate, to the Company relating
to the identification, evaluation, negotiation, financing and
purchase of properties. A portion of such fees are deferred
and are payable in annual installments with each installment
equal to .25% of the purchase price of the properties over no
less than eight years following the first anniversary of the
date a property was purchased. Payment of such fees is subject
to the 2%/25% Guidelines (see Note 3).
Earnings Per Share:
The Company has a simple equity capital structure with only
common stock outstanding. As a result, the Company has
presented basic per-share amounts only for all periods
presented in the accompanying consolidated financial
statements.
Federal Income Taxes:
The Company is qualified as a real estate investment trust
("REIT") as of December 31, 2002 as defined under the Internal
Revenue Code of 1986. The Company is not subject to Federal
income taxes on amounts distributed to shareholders provided
it distributes at least 90% of its REIT taxable income to its
shareholders and meets certain other conditions.
Operating Segments
Accounting standards have been established for the way public
business enterprises report selected information about
operating segments and guidelines for defining the operating
segment of an enterprise. Based on the standards' definition,
the Company has reported its real estate operations both
domestically and internationally (see Note 12).
Reclassification:
Certain prior year amounts have been reclassified to conform
to the current year's financial statement presentation.
2. Organization and Offering:
The Company was formed on June 4, 1997 under the General Corporation
Law of Maryland for the purpose of engaging in the business of
investing in and owning industrial and commercial real estate. Subject
to certain restrictions and limitations, the business of the Company is
managed by the Advisor.
An initial offering of the Company's shares which commenced on November
10, 1997 concluded on November 10, 1999 at which time the Company had
issued an aggregate of 29,440,594 shares ($294,406). On November 17,
1999, the Company commenced an offering for a maximum of 40,000,000
shares of common stock. The shares were offered
-19-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
to the public on a "best efforts" basis at a price of $10 per share.
The second offering concluded on November 15, 2001, by which time
36,353,686 shares ($363,537) were issued.
3. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the
Advisory Agreement between the Company and the Advisor provides that
the Advisor receive asset management and performance fees, each of
which are 1/2 of 1/% of Average Invested Assets as defined in the
Advisory Agreement. The performance fee is subordinated to the
Preferred Return, a cumulative rate of cash flow from operations of 7%.
The Advisor has elected at its option to receive the performance fee in
restricted shares of common stock of the Company rather than cash. The
Advisor is also reimbursed for the actual cost of personnel needed to
provide administrative services necessary to the operation of the
Company. The Company incurred asset management fees of $5,514, $3,592,
and $1,599 in 2002, 2001, and 2000 respectively, with performance fees
in like amount. The Company incurred personnel reimbursements of
$2,234, $1,372, and $945 in 2002, 2001, and 2000, respectively.
Fees are payable to the Advisor for services provided to the Company
relating to the identification, evaluation, negotiation, financing and
purchase of properties and refinancing of mortgages. A portion of such
fees are deferred and payable in equal installments over no less than
eight years following the first anniversary of the date a property was
purchased. Such deferred fees are only payable if the Preferred Return
has been met. The unpaid portion of the deferred fees bears interest at
an annual rate of 6% from the date of acquisition of a property until
paid. For transactions and refinancings that were completed in 2002,
2001, and 2000, current fees were $8,489, $8,193 and $8,873,
respectively and deferred fees were $6,773, $6,554 and $7,193,
respectively.
The Advisor is obligated to reimburse the Company for the amount by
which operating expenses of the Company exceeds the 2%/25% Guidelines
(the greater of 2% of Average Invested Assets or 25% of Net Income) as
defined in the Advisory Agreement for any twelve-month period. If in
any year the operating expenses of the Company exceed the 2%/25%
Guidelines, the Advisor will have an obligation to reimburse the
Company for such excess, subject to certain conditions. Only if the
Independent Directors find that such excess expenses were justified
based on any unusual and nonrecurring factors which they deem
sufficient, the Advisor may be paid in future years for the full amount
or any portion of such excess expenses, but only to the extent that
such reimbursement would not cause the Company's operating expenses to
exceed this limit in any such year. Charges related to asset
impairment, bankruptcy of lessees, lease payment defaults,
extinguishment of debt or uninsured losses are generally not considered
unusual and nonrecurring. A determination that a charge is unusual and
nonrecurring, such as the costs of significant litigation that are not
associated with day-to day operations, or uninsured losses that are
beyond the size or scope of the usual course of business based on the
event history and experience of the Advisor and Independent Directors,
is made at the sole discretion of the Independent Directors. The
Company will record any reimbursement of operating expenses as a
liability until any contingencies are resolved and will record the
reimbursement as a reduction of asset management and performance fees
at such time that a reimbursement is fixed, determinable and
irrevocable. The operating expenses of the Company have not exceeded
the amount that would require the Advisor to reimburse the Company.
The Advisor will be entitled to receive subordinated disposition fees
based upon the cumulative proceeds arising from the sale of Company
assets since the inception of the Company, subject to certain
conditions. Pursuant to the subordination provisions of the Advisory
Agreement, the disposition fees may be paid only after the shareholders
receive 100% of their initial investment from the proceeds of asset
sales and a cumulative annual return of 6% (based on an initial share
price of $10) since the inception of the Company. The Advisor's
interest in such disposition fees amounts to $240 as of December 31,
2002. Payment of such amount, however, cannot be made until the
subordination provisions are met. Management has concluded that payment
of such disposition fees is probable and all fees from completed
property sales have been accrued. Subordinated disposition fees are
included in the determination of realized gain or loss on the sale of
properties. The obligation for disposition fees is included in due to
affiliates in the accompanying consolidated financial statements.
The Company owns interests in entities which range from 33.33% to 70%
and a jointly-controlled 50% tenancy-in-common interest in property
subject to a net lease with remaining interests held by affiliates.
Controlling interests in jointly-owned entities are consolidated and
non-controlled interests in which the Company has a significant
influence are accounted for under the equity method of accounting.
The Company is a participant in an agreement with certain affiliates
for the purpose of leasing office space used for the administration of
real estate entities and for sharing the associated costs. Pursuant to
the terms of the agreement, the
-20-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Company's share of rental, occupancy and leasehold improvement costs is
based on gross revenues. Expenses incurred in 2002, 2001, 2000 were
$376, $237 and $77, respectively. The Company's current share of future
minimum lease payments is $1,462 through 2006.
4. 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.
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.
The Company is accounting for its interest in the CPA(R) Interests as
an available-for-sale security and it is measured at fair value with
all gains and losses from changes in fair value reported as a component
of other comprehensive income as part of shareholders' equity. As of
December 31, 2002, the fair value of the Company's CPA(R) Interests was
$6,258, reflecting an unrealized gain of $257 and net amortization of
$31. 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 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
======= =======
-21-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
The key variable in determining the fair value of the CPA(R) Interests
is current interest rates. As required by SFAS No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities," a sensitivity analysis of the current value of the CPA(R)
Interests based on adverse changes in the market interest rates of 1%
and 2% as of December 31, 2002 is as follows:
Actual 1% Adverse Change 2% Adverse Change
-------- ----------------- -----------------
Interest rate 7.5% 8.5% 9.5%
Fair value of CPA(R)Interests $ 6,258 $ 5,949 $ 5,662
The above sensitivity is hypothetical and changes in fair value, based
on a 1% or 2% variation, should not be extrapolated because the
relationship of the change in assumption to the change in fair value
may not always be linear.
5. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases amount to $99,533 in 2003, $99,790 in
2004, $98,535 in 2005, $98,165 in 2006, and $98,494 in 2007 and
aggregate approximately $1,586,000 through 2022.
Contingent rentals (including CPI-based increases) were approximately
$532 in 2002, $249 in 2001 and $24 in 2000.
6. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
------------
2002 2001
-------- --------
Minimum lease payments receivable $253,369 $245,397
Unguaranteed residual value 112,667 103,937
-------- --------
366,036 349,334
Less: unearned income 252,608 245,013
-------- --------
$113,428 $104,321
======== ========
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable direct financing leases are approximately $12,284 in
2003 $12,365 in 2004, $12,429 in 2005 and $12,520 in 2006 and $12,608
in 2007 and aggregate approximately $253,369 through 2031.
Contingent rents (including CPI-based increases) were approximately $63
in 2002 and $36 in 2001. No contingent rents were realized in 2000.
7. Mortgage Notes Payable:
Mortgage notes payable, all of which are limited recourse to the
Company, are collateralized by an assignment of various leases and by
real property with a carrying value of $1,019,908. As of December 31,
2002, mortgage notes payable had fixed interest rates ranging from
6.09% to 8.85% and variable interest rates ranging from 3.38% to 8.54%
and maturity dates ranging from 2008 to 2026.
Scheduled principal payments during each of the five years following
December 31, 2002 are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
- ------------------------ ---------- --------------- ------------------
2003 $ 9,136 $ 8,786 $ 350
2004 9,847 9,474 373
2005 10,784 10,394 390
2006 11,663 11,262 401
2007 12,540 12,126 414
Thereafter 612,770 593,751 19,019
---------- --------------- ------------------
Total $ 666,740 $ 645,793 $ 20,947
========== =============== ==================
-22-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Interest paid, excluding capitalized interest, was $42,813, $20,271,
and $6,246 in 2002, 2001, and 2000 respectively. Capitalized interest
payments were $808 in 2002, $1,986 in 2001, and $1,910 in 2000.
8. Dividends:
Dividends paid to shareholders consist of ordinary income, capital
gains, return of capital or a combination thereof for income tax
purposes. Since the inception of the Company, dividends per share
reported for tax purposes were as follows:
2002 2001 2000
----- ----- -----
Capital gain dividend $ .01 - -
Ordinary income .36 $ .44 $ .66
Return of capital .38 .27 -
----- ----- -----
$ .75 $ .71 $ .66
===== ===== =====
A dividend of $.18820 per share for the quarter ended December 31, 2002
($12,488) was declared in December 2002 and paid in January 2003.
9. Lease Revenues:
The Company's operations consist of the investment in and the leasing
of industrial and commercial real estate. For the years ended December
31, 2002, 2001, and 2000 the financial reporting sources are as
follows:
2002 2001 2000
--------- --------- ---------
Per Statements of Income:
Rental income from operating leases $ 98,112 $ 55,490 $ 22,879
Interest income from direct financing leases 11,798 8,899 3,777
Share of lease revenues applicable to minority interest (7,629) (4,579) (1,591)
Share of leasing revenues from equity investments 13,279 11,769 10,069
--------- --------- ---------
$ 115,560 $ 71,579 $ 35,134
========= ========= =========
In 2002, 2001 and 2000, the Company earned its share of net lease
revenues from its direct and indirect ownership of real estate from the
following lease obligations:
2002 % 2001 % 2000 %
-------- ------- -------- ------- -------- ------
Carrefour France, SAS $ 6,671 6 - - - -
Petsmart, Inc. (a) 6,228 5 $ 635 1 - -
Nortel Networks Limited 6,001 5 157 - - -
Atrium Companies, Inc. 4,451 4 2,810 4 $ 2,131 6
Advance PCS, Inc. 4,300 4 4,300 6 1,075 3
Federal Express Corporation (a) 3,915 3 3,872 5 270 1
Galyan's Trading Company 3,811 3 3,811 5 1,667 5
Advanced Micro Devices, Inc. (b) 3,259 3 3,049 4 3,049 9
Collins & Aikman Corporation 3,249 3 836 1 - -
Metaldyne Company LLC 3,142 3 2,071 3 84 -
Applied Materials, Inc. (b) 3,099 3 3,072 4 2,898 8
Tower Automotive, Inc. 2,813 2 - - - -
APW North America Inc. 2,761 2 2,650 4 1,543 4
Perkin Elmer, Inc. 2,494 2 26 - - -
Amerix Corporation 2,458 2 2,393 3 2,197 6
Celestica Corporation 2,420 2 1,614 2 - -
Institutional Jobbers Company 2,271 2 2,271 3 501 1
Gerber Scientific, Inc. 2,134 2 894 1 - -
Buffets, Inc. 2,133 2 2,131 3 588 2
CheckFree Holdings, Inc. (b) 2,108 2 2,088 3 1,681 5
Ameriserve Food Distribution, 2,090 2 2,075 3 2,118 6
-23-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Inc./McLane Company, Inc. (a)
Stellex Technologies, Inc. 1,967 2 1,883 3 1,563 4
Special Devices, Inc. (b) 1,962 2 1,119 2 - -
Best Buy Co., Inc. 1,959 2 1,989 3 1,989 6
Builders FirstSource, Inc. (a) 1,944 2 1,052 1 878 2
Gibson Guitar Corp. (c) 1,892 2 1,493 2 - -
Nexpak Corporation 1,871 2 1,262 2 - -
Waddington North America, Inc. 1,811 2 1,202 2 - -
Katun Corporation 1,746 2 - - - -
Other (a) (b) (c) 28,600 22 20,824 30 10,902 32
-------- -------- -------- -------- -------- --------
$115,560 100% $ 71,579 100% $ 35,134 100%
======== ======== ======== ======== ======== ========
(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.
10. Acquisitions of Real Estate and Financing:
The Company acquired the following properties, described below, prior
to September 30, 2002:
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
American Tire Distributors, Inc. (formerly 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.
No properties were acquired during the fourth quarter of 2002 except as
described in Note 11.
11. Equity Investments:
The Company owns interests in properties leased to corporations through
equity interests in various partnerships and limited liability
companies in which its ownership interests are 50% or less and the
Company exercises significant influence, and as tenants-in-common
subject to common control. The ownership interests range from 33.33% to
50%. Contributions, distributions and allocations of income or loss
from the equity investees are based on ownership percentages and no
fees are paid by the Company or the partnerships to any of the general
partners of the limited partnerships. 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., Special Devices, Inc., Etec Systems, Inc.
and Checkfree Holdings, Inc. As described below, the Company along with
two affiliates, CPA(R):12 and Corporate Property Associates 15
Incorporated ("CPA(R):15") formed three limited partnerships, and, on
December 26, 2002, entered into net leases with TruServ Corporation
("TruServ"). On December 12, 2002, the Company and CPA(R):15 formed a
limited partnership with 40% and 60% interests, respectively, and
assumed an existing net lease with Clear Channel Communications, Inc.
("Clear Channel"). The TruServ and Clear Channel purchases are
described below.
-24-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Summarized combined financial information of the Company's equity
investees is as follows:
December 31,
------------
2002 2001
-------- --------
Assets (primarily real estate) $591,167 $306,233
Liabilities (primarily limited recourse mortgage notes payable) 329,330 200,810
Members' equity 261,837 105,423
Year Ended December 31,
-----------------------
2002 2001 2000
-------- -------- --------
Revenues (primarily rental revenues) $ 34,521 $ 31,060 $ 27,504
Expenses (primarily interest on mortgage and depreciation) 20,352 19,539 18,294
-------- -------- --------
Net income $ 14,169 $ 11,521 $ 9,210
======== ======== ========
On December 26, 2002, the Company, CPA(R):12 and CPA(R):15 formed three
newly-formed limited partnerships with ownership interests of 35%, 15%
and 50% respectively, which purchased land and seven buildings located
in Kingman, Arizona; Woodland, California; Jonesboro, Georgia; Kansas
City, Missouri; Springfield, Oregon; Fogelsville, Pennsylvania and
Corsicana, Texas for $131,678, and entered into three master net leases
with TruServ. The leases have initial terms of 20 years followed by one
renewal term of nine years and 11 months and a second renewal term of
10 years. The leases provide for aggregate initial rent of $12,007,
with stated annual increases.
In connection with the purchase of the properties, the limited
partnerships obtained limited recourse mortgage loans totaling $76,655
(of which $27,550 was obtained in January 2003), collateralized by
deeds of trust on the properties, and lease assignments. The loans
provide for aggregate monthly payments of interest and principal of
$451, at an annual interest rate of 5.83% based on 30-year amortization
schedules. The loans mature in January and February 2013 at which time
balloon payments are scheduled.
On December 12, 2002, the Company and CPA(R):15 formed a limited
partnership with 40% and 60% interests, respectively, which purchased a
property in New York, New York for $152,042 and assumed an existing net
lease with SFX Entertainment, Inc. The lease obligations are
unconditionally guaranteed by the lessees' parent company, Clear
Channel. The lease has a remaining term through September 2020 with two
ten-year renewal options. The lease provides for an initial annual rent
of $10,914 with stated rent increases every five years.
In connection with the purchase of the properties, the limited
partnership obtained limited recourse mortgage financing of $85,000
collateralized by a mortgage and security agreement. The loan provides
for monthly payments of interest and principal of $481 at an annual
interest rate of 5.52% based on a 30-year amortization schedule. The
loan matures in December 2012 at which time a balloon payment is
scheduled.
12. Segment Information:
The Company has determined that it operates in one business segment,
real estate operations with domestic and foreign investments. The
Company acquired its first foreign real estate investment in January
2001.
For 2002, geographic information for the real estate operations segment
is as follows:
Domestic Foreign Total Company
---------- --------- -------------
Revenues $ 101,202 $ 11,154 $ 112,356
Expenses 76,348 10,098 86,446
Income from equity investments 5,320 - 5,320
Net operating income(1) 28,451 1,055 29,506
Total assets 1,151,723 168,174 1,319,897
Total long-lived assets 1,043,682 155,248 1,198,930
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
For 2001, geographic information for the real estate operations segment
is as follows:
Domestic Foreign Total Company
---------- --------- -------------
Revenues $ 65,845 $ 1,296 $ 67,141
Expenses 51,032 1,006 52,038
Income from equity investments 3,693 - 3,693
Net operating income(1) 17,947 290 18,237
Total assets 1,058,123 39,115 1,097,238
Total long-lived assets 889,238 38,092 927,330
The Company had no foreign operations in 2000.
(1) Income from continuing operations before (loss) gain.
13. Gain and Loss on Sale and Impairment Charges:
2002
In June 2002, the Company sold a property in Greenville, Texas leased
to Atrium Companies, Inc. ("Atrium") for $3,634 and recognized a gain
on sale of $333. The results of operations of the Greenville property
and the related gain on sale have been included in income from
discontinued operations in the accompanying consolidated financial
statements (see Note 14). Atrium continues to lease five properties
from the Company.
2001
The Company purchased a property in Daleville, Indiana in June 1998 and
entered into a net lease with Burlington Motor Carriers, Inc.
("Burlington"). Subsequent to Burlington's petition of bankruptcy, the
lease was terminated. The Company recorded an impairment charge of
$3,810 on the Burlington property in 2001.
2000
During 2000, the Company sold excess land at two properties for $1,104
and recognized a loss on sale of $304.
The Company purchased a property in St. Louis, Missouri in November
1998 and entered into a net lease with the Benjamin Ansehl Company
("Benjamin Ansehl"). During 2000, Benjamin Ansehl filed a petition of
bankruptcy, and subsequently vacated the property. Due to the expected
termination of the lease, the Company incurred an impairment charge of
$2,462 in 2000. In August 2001, the Company sold the property for
$2,903 and recognized a loss on sale of $346.
14. Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective for financial statements
issued for fiscal years beginning after December 15, 2001, the results
of operations and gain or loss on sales of real estate for properties
sold or held for sale are to be reflected in the consolidated
statements of operations as "Discontinued Operations" for all periods
presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the Company's commitment to a plan of
disposition after the date it is initially applied (January 1, 2002).
Properties held for sale as of December 31, 2001 are not included in
discontinued operations.
As of December 31, 2002, the operations from a property in Greenville,
Texas, which was sold in June 2002 are included as "Discontinued
Operations." A summary of Discontinued Operations for the years ended
December 31, 2002, 2001 and 2000 is as follows:
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Year Ended December 31,
-------------------------
2002 2001 2000
------ ------ ------
Revenues (primarily rental revenues) $ 150 $ 317 $ 317
Expenses (primarily interest on mortgages, depreciation and property expenses) (78) (177) (178)
Gain on sale of real estate 333 - -
------ ----- -----
Income from discontinued operations $ 405 $ 140 $ 139
====== ===== =====
15. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage and notes payable
at December 31, 2002 and 2001 was approximately $681,711 and $461,953,
respectively. The fair value of debt instruments was evaluated using a
discounted cash flow model with rates that take into account the credit
of the tenants and interest rate risk.
16. Selected Quarterly Financial Data (unaudited):
Three Months Ended
------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
--------------- --------------- ------------------ -----------------
Revenues $24,931 $27,815 $ 29,500 $30,110
Expenses 18,888 20,195 22,556 24,807
Income from continuing operations(1) 7,311 8,468 7,784 6,298
Income from continuing operations per share -
Basic and diluted .11 .13 .12 .09
Net income(1) 7,347 8,837 7,784 6,298
Net income per share -
Basic and diluted .11 .13 .12 .09
Dividends declared per share .1875 .1877 .1879 .18820
(1) Includes unrealized and realized gains (losses) of $239, $29, $(133)
and $220 for the three-month periods ended March 31, 2002, June 30,
2002, September 30, 2002 and December 31, 2002, respectively.
Three Months Ended
------------------
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
-------------- ------------- ------------------ -----------------
Revenues $ 13,568 $ 15,622 $ 17,815 $ 20,136
Expenses (1) 9,046 11,198 12,892 18,903
Income from continuing operations (2) 5,423 5,428 5,656 1,731
Income from continuing operations per share -
Basic and diluted .13 .11 .10 .02
Net income (2) 5,460 5,462 5,690 1,765
Net income per share -
Basic and diluted .13 .11 .10 .02
Dividends declared per share .175005 .178751 .182500 .186245
(1) Includes impairment charges on real estate of $3,810 for the
three-month period ended December 31, 2001.
(2) Includes unrealized and realized losses of $75 and $193 for the three
month periods ended September 30, 2001 and December 31, 2001,
respectively.
-27-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
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 initiated after
June 30, 2001 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 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 and the accounting
for asset acquisitions. The provisions of SFAS No. 142 are effective
for fiscal years beginning after December 15, 2001 and must be adopted
at the beginning of a fiscal year. SFAS No. 142 provides that goodwill
and indefinite-lived intangible assets will no longer be amortized but
will be tested for impairment at least annually. Intangible assets
acquired and liabilities assumed in business combinations will only be
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 142 did not
have a material effect on the Company's financial statements.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the
recognition and measurement of an asset retirement obligation. SFAS No.
143 requires retirement obligations associated with tangible long-lived
assets to be recognized at fair value as the liability is incurred with
a corresponding increase in the carrying amount of the related
long-lived asset. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company does
not expect SFAS No. 143 to have a material effect on the 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 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
144 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 must be presented as a discontinued operation for
all periods presented.
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 its 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
-28-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
scope of SFAS No. 144. The Company does not expect SFAS No. 147 to have
a material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends
SFAS No. 123, Accounting for Stock Based Compensation. SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock based compensation
(i.e., recognition of a charge for issuance of stock options in the
determination of income.). However, SFAS No. 148 does not permit the
use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning
after December 15, 2003. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation, description
of transition method utilized and the effect of the method used on
reported results. The transition and annual disclosure provisions of
SFAS No. 148 are to be applied for fiscal years ending after December
15, 2002. The Company does not have any employees nor any stock-based
compensation plans.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," ("FIN 45") which
changes the accounting for, and disclosure of certain guarantees.
Beginning with transactions entered into after December 31, 2002,
certain guarantees are required to be recorded at fair value, which is
different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the
change applies to contracts or indemnification agreements that
contingently require the Company to make payments to a guaranteed
third-party based on changes in an underlying asset, liability, or an
equity security of the guaranteed party. The accounting provisions only
apply for certain new transactions entered into or existing guarantee
contracts modified after December 31, 2002. The adoption of the
accounting provisions of FIN 45 is not expected to have a material
effect on the Company's financial statements.
On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), the primary
objective of which is to provide guidance on the identification of
entities for which control is achieved through means other than voting
rights ("variable interest entities" or "VIEs") and to determine when
and which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2)
the equity investment at risk is insufficient to finance that entity's
activities without additional financial support. In addition, FIN 46
requires both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE to make additional disclosures.
The transitional disclosures requirements will take effect almost
immediately and are required for all financial statements initially
issued after January 31, 2003. The Company is assessing the impact of
this interpretation on its accounting for its investments in
unconsolidated joint ventures and believes the adoption will not have a
material effect on the Company's financial statements. The Company's
maximum loss exposure is the carrying value of its equity investments.
18. Subsequent Events:
On February 7, 2003, the Company, CPA(R):12 and CPA(R):15, through a
newly-formed limited liability company with ownership interests of 41%,
15% and 44%, respectively, purchased land and 15 health club facilities
for $178,010 and entered into a master net lease with Starmark Camhood,
L.L.C. ("Starmark"). The lease obligations of Starmark are jointly
unconditionally guaranteed by seven of its affiliates.
The Starmark lease provides for an initial lease term of 20 years with
three ten-year renewal terms. Annual rent is initially $18,272 with
CPI-based increases scheduled in November 2006, 2010, 2014, 2018 and
2021. $167 of annual rent will not be included in the determination of
the future rent increases.
In connection with the purchase, the limited liability company obtained
first mortage limited recourse financing of $88,300 and a mezzanine
loan of $20,000. The first mortgage provides for monthly payments of
interest and principal of $564 at an annual interest rate of 6.6% and
based on a 30-year amortization schedule. The loan matures in March
2013 at which time a balloon payment is scheduled. The mezzanine loan
provides for monthly payments of interest and principal of $277 at an
annual interest rate of 11.15% and will fully amortize over its
ten-year term.
-29-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
The limited liability company was granted 5,276 warrants for Class C
Unit interests in Starmark and represent a 5% interest in the Company.
The warrants may be exercised at any time through February 7, 2023 at
an exercise price of $430 per unit. The warrant agreement does not
provide for a cashless exercise of units.
-30-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the Company. As
of December 31, 2002, there were 21,160 holders of record of the Shares of the
Company.
The Company is required to distribute annually at least 90% of its Distributable
REIT Taxable Income to maintain its status as a REIT. Quarterly dividends paid
by the Company since December 31, 1999 are as follows:
Cash Dividends Paid Per Share
-----------------------------------
2002 2001 2000
---- ---- ----
First quarter $.186245 $.171249 $.163116
Second quarter .187500 .175005 .163800
Third quarter .187700 .178751 .165001
Fourth quarter .187900 .182500 .167495
-------- -------- --------
$.749345 $.707505 $.659412
======== ======== ========
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and
without charge, a copy of the Annual Report on Form 10-K ("10-K") for
the year ended December 31, 2002 as filed with the Securities and
Exchange Commission ("SEC"). The 10-K may also be obtained through the
SEC's EDGAR database at www.sec.gov.
-31-